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Ideas that TransformThe Best of Ivey Business Journal ndash 2011-2012
516
21 3343
57strategy
Go Tell it On
the Mountains
How Word of
Mouth Can Lead
to Buy-In of a
Technology | 6
Social
Networking The
Corporate Value
Proposition | 11
global
business
What we can
learn from High-
Value Indian
Outsourcers | 17leadership
Developing
Leadership
Character | 22
Neuroscience
and Leadership
The Promise of
Insights | 29
Managing
people amp
organizations
The Four Intrinsic
Rewards that
Drive Employee
Engagement | 34
Why Good Ideas
Die and a Simple
Approach to Saving
Them | 39
innovation
Strategic Innovation
and the Fuzzy Front
End | 44
What is Success in
Innovation | 50
sustainability
The Top Ten
Reasons why
Businesses
arenrsquot More
Sustainable | 58
3
As the Editor of Ivey Business Journal (IBJ) I have interviewed notable public intellectuals management thinkers academics and CEOs In researching and identifying topics and authors and in discussing an approach to an article on say strategy or leadership I have been intellectually enriched and engaged beyond anything I might have imagined It makes me think of all the articles about how to engage employees that have been published in IBJ ndash and about how fortunate I am
If you glance at a yearrsquos worth of articles that have been published in IBJ you will see a rich resource of intellectual capital Importantly itrsquos intellectual capital that can be very well spent ndash applied to solve a particular organizational challenge or to inform a difficult decision We live in the Knowledge Economy and when you skim some of the articles yoursquoll discover some of the most potent ideas and practical winning theories that you can apply to your own situation or organization
The topics in this ldquoBest of Ivey Business Journalrdquo ndash strategy innovation leadership sustainability and others ndash reflect the wide range of articles that appear in each issue of IBJ They also exemplify our credo ldquoImproving the practice of managementrdquo If you read these and other articles regularly I thank you and hope that you will continue to do so If you donrsquot please join us by visiting wwwiveybusinessjournalcom and click ldquoSubscriberdquo And watch for the next collection of ldquoThe Best of Ivey Business Journalrdquo
Stephen Bernhut Editor
From the Editor
4
Flux complexity and inter-connectedness are the constants in todayrsquos business environment For any business leader managing the enterprise in such a dynamic environment is the supreme challenge But just where does that leader go to discover the best practices and strategies for steering the enterprise in such a challenging environment
True to its slogan the Ivey Business Journal (IBJ) has been helping leaders ldquoimprove the practice of managementrdquo for 85 years From the smokestack era to the Knowledge Economy and from hewers of wood to designers of microchips IBJ has been there providing leaders and managers with the best in management reading
IBJ (originally known as the Business Quarterly) is the oldest business publication in Canada and over the years it has provided readers with the analysis and solutions they need A visit to the archives is a voyage of discovery Search even the past few years and yoursquoll find articles by some of the brightest minds and most stimulating thought leaders in the top business schools around the world as well as by some of the most thoughtful and successful business practitioners
Selecting the ldquoBest ofrdquo the articles that have been published in IBJ is both enviable and unenviable It is the former because trying to select the best of many articles for example on innovation is to take a dip into a rich reservoir of intellectual capital It is unenviable because as careful as one tries to be how can you really isolate one or two articles that stand out among a list of 50 articles that are uniformly excellent
If this is your first encounter with IBJ I hope that you will become convinced to spend more time reading the next issue and the others that are published every two months If you are a subscriber reading ndash or re-reading ndash the articles in this ldquoBest ofrdquo will I hope remind you that IBJ is one of the small but rewarding pleasures of business life Stay with us as we continue to deliver the best in management writing and thinking
Dean Carol Stephenson OC Lawrence G Tapp Chair in Leadership Richard Ivey School of Business Western University
From the Dean
55
strategy
6
s t r a t e g y
Go Tell it On the Mountains How Word of Mouth Can Lead
to Buy-In of a Technology
Properly conveyed and clearly communicated word of mouth can become a terrific tool to enhance the adoption of a particular change such as the introduction of a new technology Focusing on the two most critical stages of the adoption can enhance the possibility of success even more Readers will learn how to achieve these goals in this article
by deborah Compeau and phoebe tsai
Consider this scenario Carol Ben and Adrian are business analysts in a large retail organization One day Adrian stopped by Benrsquos office to chat about getting a new laptop Benrsquos officemate Carol overhearing their conversation joined the chat Wanting information on a specific model she clicked OneNote software that manages various documents for easy search and quick retrieval Adrian had heard about OneNote but this was the first time he saw what it could do After he saw Carol use OneNote to quickly retrieve a note she kept about the latest laptops he walked away thinking ldquoThat is handyrdquo He still wasnrsquot sure which laptop to buy but he learned something about OneNote and even wanted to use it to manage his meeting notes
This scenario illustrates the important role of Word-Of-Mouth (WOM) ndash or social interaction ndash in the diffusion of an innovation where an informal social interaction becomes an opportunity for an individual to learn about a new technology by talking with or observing others The process is casual natural and potentially influential in shaping or changing the individualrsquos beliefs about the new technology This article will describe how social interaction influences the adoption of a new technology and other innovations
soCial interaCtion and innovation
Social interaction is critical in the diffusion of all innovations For example consider the case of a typical
solar panel adopter demonstrating the new equipment to six peers (Rogers 2003) In the research Rogers identified the five stages of innovation diffusion that an individual experiences over time knowledge persuasion decision implementation and confirmation Rogers found that it is during two of these stages knowledge and persuasion that the individual processes information about the innovation from various social sources (eg social circles mass media) before forming a concrete idea about the innovation
Rogersrsquo model is useful for describing how an innovation is diffused in a social system When it comes to technology however managers must consider other factors before deploying Rogersrsquo insights to tip the success of implementation in organizations First we must recognize that the adoption and the implementation of a new information technology (IT) is a specific instance of organizational change It inevitably generates uncertainty on issues that are highly relevant to employees such as changes in the workload or even employment stability (Kiefer 2005) This uncertainty gives rise to various negative emotions in employees such as anxiety annoyance and anger none of which contribute to technology acceptance or workplace morale It remains unclear as to how managers can take advantage of scenarios similar to the interaction between Adrian Ben and Carol and plant the seeds for the acceptance of a technology through social interaction We suggest several ways that managers can do so in the paragraphs below
Methodology
In our most recent study we examined the influence of both formal and informal communication on employeesrsquo acceptance of a new technology First we conducted an in-depth case study in a community health organization to identify the components that were most relevant to social interaction during the knowledge and persuasion stages of technology adoption The five key components are bull Social information The information that an employee processes may be summarized as the
7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
Ivey Publishing ndash Where the World Looks for Business Cases
Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
Ivey Executive Development ndash Discover the Leader Whorsquos Already Within You
You want to advance your career and become an empowered leader Ivey Executive Development is the key to your journey Our unique learning method immersive environment and world-class faculty all come together to deliver a learning experience unlike any other And of course our results speak for themselves
Ivey Executive Development Programs rank 1 in Canada and our faculty is consistently ranked among the best in the world by Financial Times
Learn More visit Ivey Executive Development at iveyuwocaexecutive
Speak to a Program Advisor 1-800-948-8548
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Follow Richard Ivey School of Business
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516
21 3343
57strategy
Go Tell it On
the Mountains
How Word of
Mouth Can Lead
to Buy-In of a
Technology | 6
Social
Networking The
Corporate Value
Proposition | 11
global
business
What we can
learn from High-
Value Indian
Outsourcers | 17leadership
Developing
Leadership
Character | 22
Neuroscience
and Leadership
The Promise of
Insights | 29
Managing
people amp
organizations
The Four Intrinsic
Rewards that
Drive Employee
Engagement | 34
Why Good Ideas
Die and a Simple
Approach to Saving
Them | 39
innovation
Strategic Innovation
and the Fuzzy Front
End | 44
What is Success in
Innovation | 50
sustainability
The Top Ten
Reasons why
Businesses
arenrsquot More
Sustainable | 58
3
As the Editor of Ivey Business Journal (IBJ) I have interviewed notable public intellectuals management thinkers academics and CEOs In researching and identifying topics and authors and in discussing an approach to an article on say strategy or leadership I have been intellectually enriched and engaged beyond anything I might have imagined It makes me think of all the articles about how to engage employees that have been published in IBJ ndash and about how fortunate I am
If you glance at a yearrsquos worth of articles that have been published in IBJ you will see a rich resource of intellectual capital Importantly itrsquos intellectual capital that can be very well spent ndash applied to solve a particular organizational challenge or to inform a difficult decision We live in the Knowledge Economy and when you skim some of the articles yoursquoll discover some of the most potent ideas and practical winning theories that you can apply to your own situation or organization
The topics in this ldquoBest of Ivey Business Journalrdquo ndash strategy innovation leadership sustainability and others ndash reflect the wide range of articles that appear in each issue of IBJ They also exemplify our credo ldquoImproving the practice of managementrdquo If you read these and other articles regularly I thank you and hope that you will continue to do so If you donrsquot please join us by visiting wwwiveybusinessjournalcom and click ldquoSubscriberdquo And watch for the next collection of ldquoThe Best of Ivey Business Journalrdquo
Stephen Bernhut Editor
From the Editor
4
Flux complexity and inter-connectedness are the constants in todayrsquos business environment For any business leader managing the enterprise in such a dynamic environment is the supreme challenge But just where does that leader go to discover the best practices and strategies for steering the enterprise in such a challenging environment
True to its slogan the Ivey Business Journal (IBJ) has been helping leaders ldquoimprove the practice of managementrdquo for 85 years From the smokestack era to the Knowledge Economy and from hewers of wood to designers of microchips IBJ has been there providing leaders and managers with the best in management reading
IBJ (originally known as the Business Quarterly) is the oldest business publication in Canada and over the years it has provided readers with the analysis and solutions they need A visit to the archives is a voyage of discovery Search even the past few years and yoursquoll find articles by some of the brightest minds and most stimulating thought leaders in the top business schools around the world as well as by some of the most thoughtful and successful business practitioners
Selecting the ldquoBest ofrdquo the articles that have been published in IBJ is both enviable and unenviable It is the former because trying to select the best of many articles for example on innovation is to take a dip into a rich reservoir of intellectual capital It is unenviable because as careful as one tries to be how can you really isolate one or two articles that stand out among a list of 50 articles that are uniformly excellent
If this is your first encounter with IBJ I hope that you will become convinced to spend more time reading the next issue and the others that are published every two months If you are a subscriber reading ndash or re-reading ndash the articles in this ldquoBest ofrdquo will I hope remind you that IBJ is one of the small but rewarding pleasures of business life Stay with us as we continue to deliver the best in management writing and thinking
Dean Carol Stephenson OC Lawrence G Tapp Chair in Leadership Richard Ivey School of Business Western University
From the Dean
55
strategy
6
s t r a t e g y
Go Tell it On the Mountains How Word of Mouth Can Lead
to Buy-In of a Technology
Properly conveyed and clearly communicated word of mouth can become a terrific tool to enhance the adoption of a particular change such as the introduction of a new technology Focusing on the two most critical stages of the adoption can enhance the possibility of success even more Readers will learn how to achieve these goals in this article
by deborah Compeau and phoebe tsai
Consider this scenario Carol Ben and Adrian are business analysts in a large retail organization One day Adrian stopped by Benrsquos office to chat about getting a new laptop Benrsquos officemate Carol overhearing their conversation joined the chat Wanting information on a specific model she clicked OneNote software that manages various documents for easy search and quick retrieval Adrian had heard about OneNote but this was the first time he saw what it could do After he saw Carol use OneNote to quickly retrieve a note she kept about the latest laptops he walked away thinking ldquoThat is handyrdquo He still wasnrsquot sure which laptop to buy but he learned something about OneNote and even wanted to use it to manage his meeting notes
This scenario illustrates the important role of Word-Of-Mouth (WOM) ndash or social interaction ndash in the diffusion of an innovation where an informal social interaction becomes an opportunity for an individual to learn about a new technology by talking with or observing others The process is casual natural and potentially influential in shaping or changing the individualrsquos beliefs about the new technology This article will describe how social interaction influences the adoption of a new technology and other innovations
soCial interaCtion and innovation
Social interaction is critical in the diffusion of all innovations For example consider the case of a typical
solar panel adopter demonstrating the new equipment to six peers (Rogers 2003) In the research Rogers identified the five stages of innovation diffusion that an individual experiences over time knowledge persuasion decision implementation and confirmation Rogers found that it is during two of these stages knowledge and persuasion that the individual processes information about the innovation from various social sources (eg social circles mass media) before forming a concrete idea about the innovation
Rogersrsquo model is useful for describing how an innovation is diffused in a social system When it comes to technology however managers must consider other factors before deploying Rogersrsquo insights to tip the success of implementation in organizations First we must recognize that the adoption and the implementation of a new information technology (IT) is a specific instance of organizational change It inevitably generates uncertainty on issues that are highly relevant to employees such as changes in the workload or even employment stability (Kiefer 2005) This uncertainty gives rise to various negative emotions in employees such as anxiety annoyance and anger none of which contribute to technology acceptance or workplace morale It remains unclear as to how managers can take advantage of scenarios similar to the interaction between Adrian Ben and Carol and plant the seeds for the acceptance of a technology through social interaction We suggest several ways that managers can do so in the paragraphs below
Methodology
In our most recent study we examined the influence of both formal and informal communication on employeesrsquo acceptance of a new technology First we conducted an in-depth case study in a community health organization to identify the components that were most relevant to social interaction during the knowledge and persuasion stages of technology adoption The five key components are bull Social information The information that an employee processes may be summarized as the
7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
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Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
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Learn More visit Ivey Executive Development at iveyuwocaexecutive
Speak to a Program Advisor 1-800-948-8548
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Follow Richard Ivey School of Business
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3
As the Editor of Ivey Business Journal (IBJ) I have interviewed notable public intellectuals management thinkers academics and CEOs In researching and identifying topics and authors and in discussing an approach to an article on say strategy or leadership I have been intellectually enriched and engaged beyond anything I might have imagined It makes me think of all the articles about how to engage employees that have been published in IBJ ndash and about how fortunate I am
If you glance at a yearrsquos worth of articles that have been published in IBJ you will see a rich resource of intellectual capital Importantly itrsquos intellectual capital that can be very well spent ndash applied to solve a particular organizational challenge or to inform a difficult decision We live in the Knowledge Economy and when you skim some of the articles yoursquoll discover some of the most potent ideas and practical winning theories that you can apply to your own situation or organization
The topics in this ldquoBest of Ivey Business Journalrdquo ndash strategy innovation leadership sustainability and others ndash reflect the wide range of articles that appear in each issue of IBJ They also exemplify our credo ldquoImproving the practice of managementrdquo If you read these and other articles regularly I thank you and hope that you will continue to do so If you donrsquot please join us by visiting wwwiveybusinessjournalcom and click ldquoSubscriberdquo And watch for the next collection of ldquoThe Best of Ivey Business Journalrdquo
Stephen Bernhut Editor
From the Editor
4
Flux complexity and inter-connectedness are the constants in todayrsquos business environment For any business leader managing the enterprise in such a dynamic environment is the supreme challenge But just where does that leader go to discover the best practices and strategies for steering the enterprise in such a challenging environment
True to its slogan the Ivey Business Journal (IBJ) has been helping leaders ldquoimprove the practice of managementrdquo for 85 years From the smokestack era to the Knowledge Economy and from hewers of wood to designers of microchips IBJ has been there providing leaders and managers with the best in management reading
IBJ (originally known as the Business Quarterly) is the oldest business publication in Canada and over the years it has provided readers with the analysis and solutions they need A visit to the archives is a voyage of discovery Search even the past few years and yoursquoll find articles by some of the brightest minds and most stimulating thought leaders in the top business schools around the world as well as by some of the most thoughtful and successful business practitioners
Selecting the ldquoBest ofrdquo the articles that have been published in IBJ is both enviable and unenviable It is the former because trying to select the best of many articles for example on innovation is to take a dip into a rich reservoir of intellectual capital It is unenviable because as careful as one tries to be how can you really isolate one or two articles that stand out among a list of 50 articles that are uniformly excellent
If this is your first encounter with IBJ I hope that you will become convinced to spend more time reading the next issue and the others that are published every two months If you are a subscriber reading ndash or re-reading ndash the articles in this ldquoBest ofrdquo will I hope remind you that IBJ is one of the small but rewarding pleasures of business life Stay with us as we continue to deliver the best in management writing and thinking
Dean Carol Stephenson OC Lawrence G Tapp Chair in Leadership Richard Ivey School of Business Western University
From the Dean
55
strategy
6
s t r a t e g y
Go Tell it On the Mountains How Word of Mouth Can Lead
to Buy-In of a Technology
Properly conveyed and clearly communicated word of mouth can become a terrific tool to enhance the adoption of a particular change such as the introduction of a new technology Focusing on the two most critical stages of the adoption can enhance the possibility of success even more Readers will learn how to achieve these goals in this article
by deborah Compeau and phoebe tsai
Consider this scenario Carol Ben and Adrian are business analysts in a large retail organization One day Adrian stopped by Benrsquos office to chat about getting a new laptop Benrsquos officemate Carol overhearing their conversation joined the chat Wanting information on a specific model she clicked OneNote software that manages various documents for easy search and quick retrieval Adrian had heard about OneNote but this was the first time he saw what it could do After he saw Carol use OneNote to quickly retrieve a note she kept about the latest laptops he walked away thinking ldquoThat is handyrdquo He still wasnrsquot sure which laptop to buy but he learned something about OneNote and even wanted to use it to manage his meeting notes
This scenario illustrates the important role of Word-Of-Mouth (WOM) ndash or social interaction ndash in the diffusion of an innovation where an informal social interaction becomes an opportunity for an individual to learn about a new technology by talking with or observing others The process is casual natural and potentially influential in shaping or changing the individualrsquos beliefs about the new technology This article will describe how social interaction influences the adoption of a new technology and other innovations
soCial interaCtion and innovation
Social interaction is critical in the diffusion of all innovations For example consider the case of a typical
solar panel adopter demonstrating the new equipment to six peers (Rogers 2003) In the research Rogers identified the five stages of innovation diffusion that an individual experiences over time knowledge persuasion decision implementation and confirmation Rogers found that it is during two of these stages knowledge and persuasion that the individual processes information about the innovation from various social sources (eg social circles mass media) before forming a concrete idea about the innovation
Rogersrsquo model is useful for describing how an innovation is diffused in a social system When it comes to technology however managers must consider other factors before deploying Rogersrsquo insights to tip the success of implementation in organizations First we must recognize that the adoption and the implementation of a new information technology (IT) is a specific instance of organizational change It inevitably generates uncertainty on issues that are highly relevant to employees such as changes in the workload or even employment stability (Kiefer 2005) This uncertainty gives rise to various negative emotions in employees such as anxiety annoyance and anger none of which contribute to technology acceptance or workplace morale It remains unclear as to how managers can take advantage of scenarios similar to the interaction between Adrian Ben and Carol and plant the seeds for the acceptance of a technology through social interaction We suggest several ways that managers can do so in the paragraphs below
Methodology
In our most recent study we examined the influence of both formal and informal communication on employeesrsquo acceptance of a new technology First we conducted an in-depth case study in a community health organization to identify the components that were most relevant to social interaction during the knowledge and persuasion stages of technology adoption The five key components are bull Social information The information that an employee processes may be summarized as the
7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
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Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
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4
Flux complexity and inter-connectedness are the constants in todayrsquos business environment For any business leader managing the enterprise in such a dynamic environment is the supreme challenge But just where does that leader go to discover the best practices and strategies for steering the enterprise in such a challenging environment
True to its slogan the Ivey Business Journal (IBJ) has been helping leaders ldquoimprove the practice of managementrdquo for 85 years From the smokestack era to the Knowledge Economy and from hewers of wood to designers of microchips IBJ has been there providing leaders and managers with the best in management reading
IBJ (originally known as the Business Quarterly) is the oldest business publication in Canada and over the years it has provided readers with the analysis and solutions they need A visit to the archives is a voyage of discovery Search even the past few years and yoursquoll find articles by some of the brightest minds and most stimulating thought leaders in the top business schools around the world as well as by some of the most thoughtful and successful business practitioners
Selecting the ldquoBest ofrdquo the articles that have been published in IBJ is both enviable and unenviable It is the former because trying to select the best of many articles for example on innovation is to take a dip into a rich reservoir of intellectual capital It is unenviable because as careful as one tries to be how can you really isolate one or two articles that stand out among a list of 50 articles that are uniformly excellent
If this is your first encounter with IBJ I hope that you will become convinced to spend more time reading the next issue and the others that are published every two months If you are a subscriber reading ndash or re-reading ndash the articles in this ldquoBest ofrdquo will I hope remind you that IBJ is one of the small but rewarding pleasures of business life Stay with us as we continue to deliver the best in management writing and thinking
Dean Carol Stephenson OC Lawrence G Tapp Chair in Leadership Richard Ivey School of Business Western University
From the Dean
55
strategy
6
s t r a t e g y
Go Tell it On the Mountains How Word of Mouth Can Lead
to Buy-In of a Technology
Properly conveyed and clearly communicated word of mouth can become a terrific tool to enhance the adoption of a particular change such as the introduction of a new technology Focusing on the two most critical stages of the adoption can enhance the possibility of success even more Readers will learn how to achieve these goals in this article
by deborah Compeau and phoebe tsai
Consider this scenario Carol Ben and Adrian are business analysts in a large retail organization One day Adrian stopped by Benrsquos office to chat about getting a new laptop Benrsquos officemate Carol overhearing their conversation joined the chat Wanting information on a specific model she clicked OneNote software that manages various documents for easy search and quick retrieval Adrian had heard about OneNote but this was the first time he saw what it could do After he saw Carol use OneNote to quickly retrieve a note she kept about the latest laptops he walked away thinking ldquoThat is handyrdquo He still wasnrsquot sure which laptop to buy but he learned something about OneNote and even wanted to use it to manage his meeting notes
This scenario illustrates the important role of Word-Of-Mouth (WOM) ndash or social interaction ndash in the diffusion of an innovation where an informal social interaction becomes an opportunity for an individual to learn about a new technology by talking with or observing others The process is casual natural and potentially influential in shaping or changing the individualrsquos beliefs about the new technology This article will describe how social interaction influences the adoption of a new technology and other innovations
soCial interaCtion and innovation
Social interaction is critical in the diffusion of all innovations For example consider the case of a typical
solar panel adopter demonstrating the new equipment to six peers (Rogers 2003) In the research Rogers identified the five stages of innovation diffusion that an individual experiences over time knowledge persuasion decision implementation and confirmation Rogers found that it is during two of these stages knowledge and persuasion that the individual processes information about the innovation from various social sources (eg social circles mass media) before forming a concrete idea about the innovation
Rogersrsquo model is useful for describing how an innovation is diffused in a social system When it comes to technology however managers must consider other factors before deploying Rogersrsquo insights to tip the success of implementation in organizations First we must recognize that the adoption and the implementation of a new information technology (IT) is a specific instance of organizational change It inevitably generates uncertainty on issues that are highly relevant to employees such as changes in the workload or even employment stability (Kiefer 2005) This uncertainty gives rise to various negative emotions in employees such as anxiety annoyance and anger none of which contribute to technology acceptance or workplace morale It remains unclear as to how managers can take advantage of scenarios similar to the interaction between Adrian Ben and Carol and plant the seeds for the acceptance of a technology through social interaction We suggest several ways that managers can do so in the paragraphs below
Methodology
In our most recent study we examined the influence of both formal and informal communication on employeesrsquo acceptance of a new technology First we conducted an in-depth case study in a community health organization to identify the components that were most relevant to social interaction during the knowledge and persuasion stages of technology adoption The five key components are bull Social information The information that an employee processes may be summarized as the
7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
Ivey Publishing ndash Where the World Looks for Business Cases
Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
Ivey Executive Development ndash Discover the Leader Whorsquos Already Within You
You want to advance your career and become an empowered leader Ivey Executive Development is the key to your journey Our unique learning method immersive environment and world-class faculty all come together to deliver a learning experience unlike any other And of course our results speak for themselves
Ivey Executive Development Programs rank 1 in Canada and our faculty is consistently ranked among the best in the world by Financial Times
Learn More visit Ivey Executive Development at iveyuwocaexecutive
Speak to a Program Advisor 1-800-948-8548
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55
strategy
6
s t r a t e g y
Go Tell it On the Mountains How Word of Mouth Can Lead
to Buy-In of a Technology
Properly conveyed and clearly communicated word of mouth can become a terrific tool to enhance the adoption of a particular change such as the introduction of a new technology Focusing on the two most critical stages of the adoption can enhance the possibility of success even more Readers will learn how to achieve these goals in this article
by deborah Compeau and phoebe tsai
Consider this scenario Carol Ben and Adrian are business analysts in a large retail organization One day Adrian stopped by Benrsquos office to chat about getting a new laptop Benrsquos officemate Carol overhearing their conversation joined the chat Wanting information on a specific model she clicked OneNote software that manages various documents for easy search and quick retrieval Adrian had heard about OneNote but this was the first time he saw what it could do After he saw Carol use OneNote to quickly retrieve a note she kept about the latest laptops he walked away thinking ldquoThat is handyrdquo He still wasnrsquot sure which laptop to buy but he learned something about OneNote and even wanted to use it to manage his meeting notes
This scenario illustrates the important role of Word-Of-Mouth (WOM) ndash or social interaction ndash in the diffusion of an innovation where an informal social interaction becomes an opportunity for an individual to learn about a new technology by talking with or observing others The process is casual natural and potentially influential in shaping or changing the individualrsquos beliefs about the new technology This article will describe how social interaction influences the adoption of a new technology and other innovations
soCial interaCtion and innovation
Social interaction is critical in the diffusion of all innovations For example consider the case of a typical
solar panel adopter demonstrating the new equipment to six peers (Rogers 2003) In the research Rogers identified the five stages of innovation diffusion that an individual experiences over time knowledge persuasion decision implementation and confirmation Rogers found that it is during two of these stages knowledge and persuasion that the individual processes information about the innovation from various social sources (eg social circles mass media) before forming a concrete idea about the innovation
Rogersrsquo model is useful for describing how an innovation is diffused in a social system When it comes to technology however managers must consider other factors before deploying Rogersrsquo insights to tip the success of implementation in organizations First we must recognize that the adoption and the implementation of a new information technology (IT) is a specific instance of organizational change It inevitably generates uncertainty on issues that are highly relevant to employees such as changes in the workload or even employment stability (Kiefer 2005) This uncertainty gives rise to various negative emotions in employees such as anxiety annoyance and anger none of which contribute to technology acceptance or workplace morale It remains unclear as to how managers can take advantage of scenarios similar to the interaction between Adrian Ben and Carol and plant the seeds for the acceptance of a technology through social interaction We suggest several ways that managers can do so in the paragraphs below
Methodology
In our most recent study we examined the influence of both formal and informal communication on employeesrsquo acceptance of a new technology First we conducted an in-depth case study in a community health organization to identify the components that were most relevant to social interaction during the knowledge and persuasion stages of technology adoption The five key components are bull Social information The information that an employee processes may be summarized as the
7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
Ivey Publishing ndash Where the World Looks for Business Cases
Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
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You want to advance your career and become an empowered leader Ivey Executive Development is the key to your journey Our unique learning method immersive environment and world-class faculty all come together to deliver a learning experience unlike any other And of course our results speak for themselves
Ivey Executive Development Programs rank 1 in Canada and our faculty is consistently ranked among the best in the world by Financial Times
Learn More visit Ivey Executive Development at iveyuwocaexecutive
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Follow Richard Ivey School of Business
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6
s t r a t e g y
Go Tell it On the Mountains How Word of Mouth Can Lead
to Buy-In of a Technology
Properly conveyed and clearly communicated word of mouth can become a terrific tool to enhance the adoption of a particular change such as the introduction of a new technology Focusing on the two most critical stages of the adoption can enhance the possibility of success even more Readers will learn how to achieve these goals in this article
by deborah Compeau and phoebe tsai
Consider this scenario Carol Ben and Adrian are business analysts in a large retail organization One day Adrian stopped by Benrsquos office to chat about getting a new laptop Benrsquos officemate Carol overhearing their conversation joined the chat Wanting information on a specific model she clicked OneNote software that manages various documents for easy search and quick retrieval Adrian had heard about OneNote but this was the first time he saw what it could do After he saw Carol use OneNote to quickly retrieve a note she kept about the latest laptops he walked away thinking ldquoThat is handyrdquo He still wasnrsquot sure which laptop to buy but he learned something about OneNote and even wanted to use it to manage his meeting notes
This scenario illustrates the important role of Word-Of-Mouth (WOM) ndash or social interaction ndash in the diffusion of an innovation where an informal social interaction becomes an opportunity for an individual to learn about a new technology by talking with or observing others The process is casual natural and potentially influential in shaping or changing the individualrsquos beliefs about the new technology This article will describe how social interaction influences the adoption of a new technology and other innovations
soCial interaCtion and innovation
Social interaction is critical in the diffusion of all innovations For example consider the case of a typical
solar panel adopter demonstrating the new equipment to six peers (Rogers 2003) In the research Rogers identified the five stages of innovation diffusion that an individual experiences over time knowledge persuasion decision implementation and confirmation Rogers found that it is during two of these stages knowledge and persuasion that the individual processes information about the innovation from various social sources (eg social circles mass media) before forming a concrete idea about the innovation
Rogersrsquo model is useful for describing how an innovation is diffused in a social system When it comes to technology however managers must consider other factors before deploying Rogersrsquo insights to tip the success of implementation in organizations First we must recognize that the adoption and the implementation of a new information technology (IT) is a specific instance of organizational change It inevitably generates uncertainty on issues that are highly relevant to employees such as changes in the workload or even employment stability (Kiefer 2005) This uncertainty gives rise to various negative emotions in employees such as anxiety annoyance and anger none of which contribute to technology acceptance or workplace morale It remains unclear as to how managers can take advantage of scenarios similar to the interaction between Adrian Ben and Carol and plant the seeds for the acceptance of a technology through social interaction We suggest several ways that managers can do so in the paragraphs below
Methodology
In our most recent study we examined the influence of both formal and informal communication on employeesrsquo acceptance of a new technology First we conducted an in-depth case study in a community health organization to identify the components that were most relevant to social interaction during the knowledge and persuasion stages of technology adoption The five key components are bull Social information The information that an employee processes may be summarized as the
7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
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Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
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7
product of two types of communication These are formal communication initiated by management through face-to-face meetings or communication technologies (eg electronic bulletin) and informal communication the daily social interaction in the form of word-of-mouth
bull User belief We selected the four most critical beliefs that an employee holds regarding the adoption of a new technology Perceived Usefulness Perceived Ease of Use Perceived Resources (ie the perceived availability of resources that support employees to use the technology successfully) and Subjective Norm (ie perceived expectations from others on the individual to use the technology)
bull User emotion Employees may experience a broad range of emotions when adopting a new technology ranging from enthusiasm indifference to anger (Klein and Sorra 1996) Based on the findings of the case study and the literature review on organizational changes we chose enthusiasm and anxiety to represent employeesrsquo emotion
bull Usage intention The focus of technology-adoption research is on an individualrsquos decision to adopt the technology Therefore we used Intention to Use the Technology as one outcome variable
bull Coping intention In the case study we observed employeesrsquo stress responses triggered by the coming of a new technology as well as the various coping strategies (eg humour) deployed in the attempt to regulate the negative emotions We were particularly intrigued by the strategy of Seeking Social Support in the case study because this strategy is highly relevant to the information exchange and processing during the innovation diffusion It is defined as the intention to reach out to others in order to cope with the anxiety associated with the new technology We incorporated Intention to Seek Social Support as another outcome variable
Once the above five components and their pertinent variables were identified we then examined the inter-relationships among the variables with field data collected through an online survey We invited a random sample of 1445 actively-employed alumni of the Richard Ivey School of Business to fill out the survey
Key findings
Almost half (477 percent) of the 241 people who responded were experiencing the implementation of one or more new technologies at work This means that at any point in time one organization in two will be experiencing a change in work based on the rollout of a new technology The type of technology ranged
from knowledge management transaction processing analysis and reporting (eg SAP) to communication and collaboration tools (see Figure 1)
figure 1 percentage of technology types
These new technologies were for the most part mandatory for the employees To the statement ldquoI can easily avoid the usage of this new technology for my jobrdquo for example 175 percent of the respondents moderately or strongly agreed (see Figure 2) In other words less than 20 percent of the respondents were in the high-choice group The majority (684 percent) had to use the new technology in order to remain competent at work
s t r a t e g y
Auditing (2)
Business Intelligence (5)
Business Planning (7)
Collaboration amp Communication (19)
Customer Relationship Management (16)
Database (4)
Enterprise Resource Planning (6)
Human Resource Management (4)
Knowledge Management (2)
Operating System (6)
Other (2)
Property Management (3)
Training and Education (2)
Transaction Processing (8)
Transaction Reporting (6)
Transaction Supporting (8)
8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
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2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
l e a d e r s h i p
2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
Ivey Publishing ndash Where the World Looks for Business Cases
Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
Ivey Executive Development ndash Discover the Leader Whorsquos Already Within You
You want to advance your career and become an empowered leader Ivey Executive Development is the key to your journey Our unique learning method immersive environment and world-class faculty all come together to deliver a learning experience unlike any other And of course our results speak for themselves
Ivey Executive Development Programs rank 1 in Canada and our faculty is consistently ranked among the best in the world by Financial Times
Learn More visit Ivey Executive Development at iveyuwocaexecutive
Speak to a Program Advisor 1-800-948-8548
wwwiveybusinessjournalcom
Follow Richard Ivey School of Business
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8
s t r a t e g y
figure 2 percentage of levels of Choice in using the new technology
forMal CoMMuniCation
If employees are to feel fully informed formal communication should include the following bull What the technology is in terms of its functionality capacity and visual layout
bull Why the new technology has to be adopted bull How employeesrsquo future working condition (eg work load) and personal status in the organization are affected and
bull When various implementation activities (eg training) will occur
Before managers make an announcement concerning a new technology they should first gauge how well these four aspects are communicated If one or more of the four aspects is communicated poorly it may lead to employeesrsquo anxiety toward the adoption of the new technology When the four aspects of information are thoroughly delivered in a timely manner (ie high-quality of formal communication) employees are more likely to become enthusiastic about the new technology (see Figure 3) In addition they are also more likely to believe that the technology is going to be useful and easy to use that their usage will be supported with resources and that other people expect them to adopt the technology
figure 3 formal Communication of high Quality is related to higher enthusiasm
So why donrsquot more managers communicate like this Research has shown that poor communication regarding changes in organizations actually results from good intentions (DiFonzo and Bordia 1998) That is managers are often silent about changes only because they do not want to mislead employees by giving out (incomplete) information that may be subject to change In other words because we know change is stressful we tend to avoid saying anything that might increase stress until we are sure about what will take place But doing so actually has the opposite effect It increases stress because it promotes greater uncertainty
To curb the tendency to remain quiet managers should ldquoTell employees what is known Answer questions that can be answered and explain why others cannot be answeredrdquo during system implementation (DiFonzo and Bordia 1998 p 299) To minimize usersrsquo negative reaction when information changes (which it inevitably will in a complex project) managers should acknowledge that certainty or uncertainty underlies the information Giving your best estimate of what you think will happen today and acknowledging whenwhy you think it might change will satisfy the short-term need for information while creating the expectation that things are subject to change In brief timely and thorough communication initiated by management plays an important role in stimulating enthusiasm among employees whether the technology is mandated or discretionary After all enthusiasm is the essence of buy-in When employees are enthusiastic about a new technology adoption will follow more naturally
inforMal CoMMuniCation
Informal communication ndash in the form of favourable word-of-mouth about the new technology ndash has a similar
Low Choice (684)
Medium Choice (141)
High Choice (175)
684
175
141
Low in Formal Communication Quality
High in Formal Communication Quality
14
12
10
8
6
4
2
Lower Enthusiasm
Higher Enthusiasm
9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
l e a d e r s h i p
Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
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2 5
l e a d e r s h i p
JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
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2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
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2 9
Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
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3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
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3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
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3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
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references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
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M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
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M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
Ivey Publishing ndash Where the World Looks for Business Cases
Ivey Publishing is the leader in providing business case studies with a global perspective With over 8000 products in the collection and publishing an average of six new cases each week Ivey cases are lauded by the academic community as meeting the rigorous demands of management education by responding
to the ever changing needs of business and society Visit iveycasescom
ivey business Journal reprints ndash Reprints from Ivey Business Journal are available through Ivey Publishing Ivey Business Journal is published six times per year in an online format
Since 1933 Ivey Business Journal has delivered incisive practical articles about managing and improving the practice of management Visit iveybusinessjournalcom
Ivey Executive Development ndash Discover the Leader Whorsquos Already Within You
You want to advance your career and become an empowered leader Ivey Executive Development is the key to your journey Our unique learning method immersive environment and world-class faculty all come together to deliver a learning experience unlike any other And of course our results speak for themselves
Ivey Executive Development Programs rank 1 in Canada and our faculty is consistently ranked among the best in the world by Financial Times
Learn More visit Ivey Executive Development at iveyuwocaexecutive
Speak to a Program Advisor 1-800-948-8548
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9
effect in boosting employeesrsquo enthusiasm We also found that positive word of mouth alleviates anxiety in the information recipient (see Figure 4) In addition those who heard favourable word-of-mouth are more likely to believe that the new technology is easy to use and that there will be sufficient resources to support such usage
figure 4 favourable WoM is related to lower anxiety
Figure 5 shows respondentsrsquo evaluation of how favourable the opinions were from six social groups of people at work on a five point scale 1 being extremely unfavourable and 5 being extremely favourable
figure 5 averaged favourability of Word-of-Mouth (WoM)
s t r a t e g y
It is somewhat heartening to see that at least in aggregate the informal communication about new technologies is positive across the six social groups We did however find a range with some respondents receiving negative WOM For example the distribution of WOM is relatively even in the group of friends at work it is skewed toward the positive side in the group of the ldquogo-tordquo persons (see Figure 6) No matter what the distribution some of our respondents got negative WOM from either group
figure 6 examples of distribution of WoM
Unfavourable Word of Mouth
Other superiors
Your immediate supervisor
Your ldquogo-tordquo persons
Expert users in your unit
People who do the same job
Circle of friends at work
Favourable Word of Mouth
Circle of friends at work
The ldquogo-tordquo persons
Co
un
tC
ou
nt
35
40
30
25
50
50
2040
40
1530
30
10
20
20
5
10
10
1 2 3 4 5
1 2 3 4 5
Lower Anxiety
Higher Anxiety
30 31 32 33 34 35 36
1 0
s t r a t e g y
What should managers do with the negative word-of-mouth We recommend that managers balance the negative with some positive word-of-mouth This strategy is similar to online reputation management Make sure that positive information comes out before the bad and that it is louder Although managers cannot mandate positive word-of-mouth they can encourage those who are trying a new system to share their experience (eg ldquoIf itrsquos good go tell your friends If itrsquos not so good come tell usrdquo) Our case study showed that even the thought that management will attend to as many glitches as possible can motivate employees trying something new to give out positive word-of-mouth This in turn lowers anxiety and boosts enthusiasm in others who receive such information
In addition managers can improve the physical layout of office space and the work space so that social interaction is not diminished This idea is similar to knowledge-sharing friendly offices Voluntarily telling colleagues how handy a new technology is actually requires opportunities for them to encounter it first as shown in the scenario earlier Prior research showed that ldquowater-cooler conversationrdquo can improve employeesrsquo technological competence (Boudreau and Seligman 2005) because employees can quickly seek information from others for technology-related problem-solving Likewise employees can learn about a new technology from others and engage in collective sense-making in this type of unplanned encounters The availability of time and space for members of the same work group to take a break together may have similar effects Another recommendation is to place expert users in a highly accessible area of the office This may help the good news of a new technology travel fast and far
For virtual teams physical encounters are much less feasible for spreading word-of-mouth In our case study the opportunities for social interaction were limited for employees in the community health organization mainly due to different work schedules and the job requirement to constantly commute to various neighbourhoods In that situation managers can provide communication tools to enable social encounters in the virtual world Social networking tools such as messaging Facebook and Twitter can be developed to facilitate community building and informal information sharing
Implementing new IT will likely always be a challenge But we can use the results of this research to help limit the difficulties by taking advantage of both formal and informal communication to influence employeesrsquo emotions Through improved communication in the WHAT WHY HOW and WHEN of the new technology and facilitated circulation of favourable word-of-mouth managers can gain buy-in from employees and keep their anxiety at bay during system implementation
The Authors
deborah CompeauDeborah Compeau is Professor of Management Information Systems in the Richard Ivey School of Business at the University of Western Ontario
phoebe tsaiPhoebe Tsai will receive a PhD in Information Systems in June from the Richard Ivey School of Business at The University of Western Ontario
reference
bull Boudreau M and L Seligman (2005) Quality of use of a complex technology A learning-based model Journal of Organizational and End User Computing 17(4) 1-22
bull DiFonzo N and P Bordia (1998) A tale of two corporations Managing uncertainty during organizational change Human Resource Management 37(3amp4) 295-303
bull Kiefer T (2005) Feeling bad Antecedents and consequences of negative emotions in ongoing change Journal of Organizational Behavior 26 875-897
bull Klein K and J S Sorra (1996) The challenge of innovation implementation Academy of Management Review 21(4) 1055-1080
bull Rogers E M (2003) Diffusion of Innovations 5th New York The Free Press
1 1
s t r a t e g y
Marketers habitually find it hard to quantify the value of what they do and their use of social networks is the latest manifestation of this difficulty Why is it so hard to determine the business value of social networks This article explores the slippery slope of coming up with a useful lsquosocial media ROIrsquo and offers new ways to understand social networkingrsquos value proposition
by Joseph sexsmith and robert angel
Almost two years ago in an article in the July-August issue of the Ivey Business Journal ldquoSocial Networking The View from the C-Suiterdquo we wrote that ldquoMany managers today are uncertain about what social networking really means how it fits their business strategy and most importantly how they can define its practical value to the businessrdquo How little the world changes Despite two years of increasing corporate social media activity our research is telling us that the C-Suite is still finding it extremely hard to define their organizationrsquos value proposition for social media
eMarketer a US-based firm that provides research and analysis of digital media recently reported that 175 chief marketing officers were asked to identify social media activities with the highest Return on Investment Most did not know the return (ldquoDramatic Difference in Approach to Social Media Metricsrdquo Feb 8 2011) Even lsquoFacebookrsquo and lsquoratings and reviewsrsquo the two features rated as having the greatest ROI were only so rated by about 15
Social Networking The Corporate Value Proposition
percent of respondents Other researchers have recently told similar stories We agree with eMarketer that ldquoThe ROI question is still not answeredrdquo
This article takes a further look at social mediarsquos value to C-Suite decision makers How can executives quantify the benefits of fostering customer engagement and brand How can they impute value to transforming influence How should real-time collaborative dialogue between the company and customers and vice versa best be expressed as a value proposition
1 rethinKing hoW MarKeting vieWs soCial Media
Given marketingrsquos prominence as an expense category the C-Suite has long wrestled with the question ldquoWhat is our return on marketingrdquo
To test the question we asked a number of practitioners how they measure the value of social media and what sort of results they were seeing from its use We found the answer can all too easily default to marketing goals rather than specific metrics and results Certainly goals are a valid conceptual starting point especially for social-media measurement beginners Indeed failure to identify goals before selecting metrics frequently leads to underperformance
However goals can only take us so far in defining and assessing the value of social media and they will likely be insufficient when we have to make operational marketing decisions If executives are to deliver on brand promises they need a deep understanding of customers one that can be gained from evaluating customer behavioural data at a granular level
finding actionable metrics
Analysis of customer data and other metrics has been evolving through a hierarchy of increasing sophistication (see the accompanying table)
table Metrics Analysis Hierarchy
Level 1 ndash Volume oriented
Level 2 ndash Customer attitudes and needs
Level 3 ndash Qualitative measure
Level 4 ndash Modeling
Replication quotient High Moderate Moderate Moderate
Observed utility to marketers Low Moderate Moderate High
Measurement implicationsMore-is-better
mindsetReinforces volume
orientationInforms rather than directs
Prioritizes iterative optimizes
1 2
level 1 ndash volume orientedTraditionally marketers wanting to address operational matters have taken a more quantifiable approach using metrics that have tended to be volume-oriented Typical examples are number of followers traffic driven to the website community traffic hit rates page openings click-throughs time spent on-line responds vs non-responds postings and comments conversions and units sold Volume-oriented metrics are undoubtedly useful but relied on by themselves they can foster a lsquomore is betterrsquo mindset They also tend to provide only a partial answer ndash flagging increases or decreases in customer activity without actually telling us what to do Our view is that volume-oriented practices limit value for decision makers in the C-suite
level 2 ndash Customer attitudes and needsLimitations of volume metrics have led behavioural marketers to examine customer attitudes and needs more closely Metrics include customer satisfaction cost-of-acquisition brand awareness brand competitiveness and brand likeability The lsquonet promoter scorersquo is an indicator of customersrsquo attitudes derived from measuring the customerrsquos likelihood to recommend the firm or product to others These metrics bring a more qualitative view of customers but they still can reinforce volume oriented thinking and thus are inadequate as proxies for quantitative insights Naturally the more longitudinal the data become over time the more relevant they will be to those who really want to know lsquowhat happenedrsquo Our view is that a more holistic view of the customer one provided by a social media microscope offers considerable promise But a lack of consistent data historical bases sharing standards and transparency will keep it off many C-suite dashboards
level 3 ndash Qualitative measuresSome marketers in this lsquoadvancedrsquo category optimize their operational practices and brand ndash execution value proposition the same way that they work to optimize their ad spend This has led to use of qualitative measures to support operational questions like What are our customersrsquo individual needs How good are our insights into the way our customers regard and connect with our brand How and when can we best engage our customers and enlist them as collaborators How innovative differentiated and resilient will our brand continue to be in these commoditized and competitive times Our 2009 article gave some examples of social media qualitative metrics that bear repeating customer share of wallet reasons for changes in composition of customer lifetime value and satisfaction channel effectiveness related to customer needs and effect of time to market pricing power and brand equity The aim is to get dynamic insights into brand engagement audience captivation level of interest and content curation ndash why people buy
s t r a t e g y
what triggers a stretch-purchase who the key influencers are and what strengthens relationships Until these questions can be answered adequately these qualitative measures will inform a C-suite memberrsquos decision but not direct it
level 4 ndash ModelingThere is an emerging fourth level in the hierarchy modeling planning-related data This is so far a relatively underdeveloped (and under-automated) aspect of marketing practice As discussed in the rest of this article it involves creating social media analytical models that synthesize the complexities of both volume and qualitative data ndash with value projections iterative lsquowhat ifrsquo calculations decision criteria and prioritization of activities The challenge for modellers is to eliminate the bias inherent in the mathematics underlying the business-as-usual mix optimization models that have been in use for over 30 years now A message to econometricians it is no longer business as usual so stop running those forecasts More than any other decision makers marketing planners tend to get this
Level 4 (modeling) in our view is the most robust mdash and is essentially the platform on which the rest of this article is based
Actual measurement practices in supporting specific brand planning can often be somewhat experimental Examples related mainly to the first three levels are illustrated in the boxes containing comments from three of the leading marketers we spoke to Their comments reinforce the understanding that a combination of quantitative and qualitative marketing measures helps the marketer improve interaction tone quality and benefit to the customer ndash not just in social media but across the full spectrum of the business
2 sales lift vs CustoMer relationship value lift
Modelling is not just for use in internal marketing It can also to be used to answer questions posed by the other members of the C-Suite about those value-specific marketing activities that deliver value for the organization Marketers should avoid overwhelming their colleagues with too much data but they do need to provide a convincing justification for social media investments They also need to distinguish the implications of sales lift from relationship lift
empirical results from brand lifecycle activities exampleMark Daprato VP Marketing at Swiss Chalet measures ldquothe social media cost of acquiring a fan the incremental benefit of unpaid content compared with paid clicks and soft benefits like fan responses to an on-line customer complaint postingrdquo that together provide social media value added He adds that brand lifecycle only delivers a return when you reach the affinity stage with customers
1 3
sales lift
Marketing analytics historically has tended to be more about product than customer ie incremental units sold or less helpfully incremental lsquoconversationsrsquo Some in the leader category of brands claim to be able to map the connection from creating demand awareness to a conversion But in social media it is hard to find anyone able to seamlessly replicate the process that got the consumer there the first time Hard results from specific promotional activity are often easier to measure than soft benefits from improved relationships We would like to see this reversed
A typical product-planning model is based on the direct marketing deal ndash for example a coupon or a price cut
maybe backed by a print or TV advertising campaign It is not surprising that many of these models originated in the advertising industry
Several social marketers we spoke to have found it quite difficult to adapt traditional advertising interaction models to on-line interactions even when deal-based Perhaps insufficient on-line history has yet been accumulated to refine their model assumptions
The promotional approach to social media appears to have staying power Our research indicates that companies posting deals on social media generally express satisfaction with results
claiming the direct marketing approach is generating incremental sales and customer receptiveness
tools to support product or service promotion
Promotional activities are also the foundation for many social media support tools reflected for example by deal-based web sites like Groupon or Facebook Twitter and other popular sites whose facilities are used among other things for posting promotions
New social media tools are constantly being introduced to support campaign management and advertising planning a lot of it geared toward automating and standardizing the workflow and business processes supporting them We spoke with two firms providing analytical services that include ROI calculations for their tools
e10egencyrsquos The Drum Platform is an Oakville Ontario-based web service that combines direct marketing and social media sharing Managing Partner Derek Lackey characterizes the approach as ldquostop pretending when what you really want is to sellrdquo His calculations are based on customer conversions ldquodriving traffic rather than just getting eyeballsrdquo He explains that ldquovalue computations are derived from marketing benefits like increased response rates and tracking campaign performance ndash but also from value imputed to marketing activities such as building opt-in email lists identifying key brand influencers collecting additional data about customers and improving organic rankingsrdquo His point is that ldquoYou can expect direct measures as well Indeed you SHOULD expect direct measures In the mass marketing era the owners of the media had a strong commitment to not being too measurable In the Google Age no such commitment exists Now we can be more accountablerdquo
Crowd Factory a San Francisco-based customer acquisition web solution also expresses value in terms of conversion Sanjay Dholakia Crowd Factoryrsquos CEO says that ldquobenefits tend to come in two primary ways amplifying the brand for existing customers and acquiring new customersrdquo The result is the ability to engage and retain customers in a more powerful way ldquoWe seek revenue lift by having customers spread the word rather than having to spend marketing budget on paid clicks The conversion rate on social trafficrdquo he adds ldquotends to be at least three to five times higher than other trafficrdquo
promotions and relationships
Few of the companies we spoke to use social media exclusively for promotional deals It seems that with
opportunity cost exampleFrank Trivieri GM Canadarsquos General Director Marketing says that social media is not just a mechanism that gets the message out but one that ldquoenables us to listen closely to the customersrdquo He is mindful of the opportunity cost from not doing this ndash ldquoIf we donrsquot connect effectively in social media channels we will miss out on key conversations and opportunities to engage people who may never have had GM on their radar beforerdquo Trivieri uses a commercial measurement tool to track net positivenegative comments to augment traditional audience activity metrics like increases in numbers of pages viewed brand scores etc and has established a cross-functional social media council at GM Canada to ensure that the company remains relevant and accessible
value to the customer (rather than just to the organization) example Uwe Steuckmann Loblaws Senior VP of Marketing says ldquoValue to the customer is based on providing useful information to people who chose to interactrdquo Loblaws is focusing not so much on return on investment as return on attention (ldquois it important enough to interrupt someone in this world of lsquofreersquordquo) Steuckmann notes how easier email results are to measure with metrics like lsquowas it openedrsquo lsquowas it clicked throughrsquo or lsquowas it forwardedrsquo and is still looking for a really good social media equivalent
s t r a t e g y
1 4
social media many companies that rely heavily on promotional deals are also active relationship builders reflecting apparent widespread recognition that not using social media to build relationships is to miss the larger opportunity As Crowd Factoryrsquos Dholakia put it ldquoif companies are just using social media as another sales channel then they are not taking full advantage of the powerful relationship benefits on offerrdquo
For example an airline that has been using Twitter to pump out information on last-minute deals also uses Twitter extensively for one-to-one interactions Its passengers say that last-minute deals are something they really want to have brought to their attention they also say that their ongoing personal connection with the airline is very important to them
It should be noted that some companies do not post deals on social sites at all such as Swiss Chalet ldquoMany product marketers are not deal-centricrdquo Mark Daprato of Swiss Chalet points out citing Coke and Pepsi as well as Swiss Chalet ldquoOur brand would be diluted if we were thought of by the social media community as a discounterrdquo
relationship lift
Some social marketers have started value computations by measuring social media value in the aggregate much as many promotional models do An example of a simple aggregate relationship value model is an estimate of enterprise value before a given marketing activity compared with value computed afterwards
Others adapt traditional one-to-one relationship engagement models to social media A bankrsquos analytics manager told us he is doing this to evolve a longer term conversation and make lsquosocialrsquo the medium of customer choice
Analysis has tended to become more granular over time ie at a more detailed transactional relationship level ndash such as for loyalty card responses propensity attrition fraud attribution lifestyle segmentation or event triggers ndash with calculations evolving from computations of groups of customers down to individual customersrsquo current value and then to individual customersrsquo net present value
If product sales lift is the currency for the promotional use of social media what then might be the equivalent for a relationship approach For Ian Barr Vice President of RocketXL a unit of the EdC marketing agency network the brand objective typically is the driving force This often refers back to optimizing customer lifetime value a concept many marketers have relied on over the years but in a social networks world have had little ability to re-create in any meaningful way
Customer lifetime value holds considerable promise to marketers who are trying to provide senior leadership with a long term driver of decision making
Aaron Magness Senior Director Brand Marketing amp Business Development of Zappos the Las Vegas-based clothing and shoe distributor famous for uncompromising on-line service told us that Zapposrsquo social media investments build relationships ldquoWe think about future relationship value compounding just like the time value of money We build customer value similar to the way others build cash net present valuerdquo he told us ldquoMetrics designed just for same day or even for same month results will tend to produce a lower return over time Short term effects do not matter as much as long term value creationrdquo
RocketXLrsquos Barr points out the importance of prioritization in sustaining a brandrsquos increase in value ldquoThe old style was to grow the value of a customer through a huge investment in paid mediardquo he observed ldquoThis leaves little budget for social media measurement especially since there is so much that can be measured Today web brands can be overwhelmed by the number of fans as well as the amount of datardquo For Barr measurement is an ongoing examination of which data points yield the significant findings that enable marketers to keep relationship and brand values moving forward
This will take on increasing importance in the future given Morgan Stanleyrsquos recent estimate that global internet ad spending is growing at a 40 percent rate
3 a soCial analytiCal Model for sMart systeM planning
Advanced social analytical model examples bull Longitudinal data and collaborative models bull Cause-effect maps bull Polling technology often related to search-engine marketing to help understand the words being used and their relative attributes
bull Behaviour modeling including behaviour rewards and incentives
bull Return on marketing investmentcustomer investment cash flow models and business impact models
Source ldquoSocial Networking The View from the C-Suiterdquo by Robert Angel and Joseph Sexsmith Ivey Business Journal JulyAugust 2009
There are a range of advanced social analytical model types in use today such as those listed in the accompanying box
These are tools that aim to provide a more accessible and analytical picture of grass-roots opinion and future activity around a brand than traditional focus groups
s t r a t e g y
1 5
smart system planning
We believe that lsquosmart system marketing planningrsquo will become a very new way for executives to take in the past present and future of a companyrsquos ability to plan forecast and measure the effectiveness of their investment in marketing It is lsquosmartrsquo because it is self-actualizing and self-sustaining It is a lsquosystemrsquo because it is technologically-borne and close-looped It is lsquomarketingrsquo because it addresses all aspects of marketing strategy and operations new and old It is lsquoplanningrsquo because it reinvents the function and new role as the ultimate site of collaboration for all business planners ndash within a company and with all those in the marketing value chain
At the heart of smart system planning is modeling the value proposition This helps clarify the core rationale of social media especially finding influencers taking collaborative approaches and fostering brand interaction ndash leading to relationship engagement and transformation ndash and then to building deeper relationships that sustain brand value
As Susan Smith of the strategic communication firm Livewire Communications puts it ldquothe key is to identify the factors that will produce a shift in brand mindsetrdquo
the business impact Model
We have used business impact models to create marketing business cases during more than two decades translating specific measurements selected case by case The models are essentially customized payback calculations that use assumptions about customer behavioural implications derived from previous experience
The models typically provide quantified estimates of potential economic benefits often revenue lift or cost reductions in spreadsheet format and include forecasted ROI
Successful business impact models generally include the following characteristics bull Conservative assumptions that the C-Suite can believe bull Activity-based revenue and cost attribution ie tied to actual social media activities
bull Actionable metrics ie that point to what needs to be done
bull Iterative calculations to indicate sensitivities break even points etc
bull Details for credibility but not so many as to overwhelm people with data
bull Bottom-line oriented to get to the heart of the business decisionrsquos expected result
We have used these models in a variety of ways for instance to project the business value of prospective
marketing activities such as responding to customer-initiated activities launching promotional programs and conducting activity-initiated dialog with customers and suppliers Models are typically customized for the industry activities and assumptions
4 getting froM MarKeting planning to finanCial paybaCK
Today just as we wrote two years ago ldquosenior decision makers can no longer avoid facing the challenge of knowing how to use the data to judge the depth and characteristics of interactions and brand perceptionsrdquo How this is done could have far reaching implications for the future direction of marketing
Better analysis of the value of social media could help head off any incipient business tensions between chief marketing officers and the rest of the C-Suite
We see risks of moving in the other direction if social media is widely used simply for posting deals on Facebook and Twitter In other words promotion-skewed business processes could dominate social media (and cross-platform) planning practices sending social media eventually back to a traditional productservice push and a lsquocompete on pricersquo mindset ndashmessages sent to the mass market rather than conversations to build one-to-one relationships
Marketing can lend a business model-building perspective to all of the chatter around what collaboration really is thereby optimizing the value of customer relationships This would see social media firmly established as mainstream for Canadian executives seeking to discern the differences among alternative relationship planning options competing for restricted marketing resources
As is the case with all of the practices we have reviewed in this article the greatest obstacle to developing a smart systems view of social media is that change-resistant marketers will cause C-suite members to resist adopting it
The Authors
Joseph sexsmithJoseph Sexsmith is an independent strategy advisor to marketers in the media technology and consumer sectors He can be reached at josephsexsmithgmailcom
robert angelRobert Angel is President of the Gilford Group which specializes in understanding customers as individuals and enterprise performance strategy He can be reached at bobangelgilfordgrpcom
s t r a t e g y
1 6
global business
1 7
g l o b a l b u s i n e s s
For the past decade Indian outsourcing firms have talked about lsquomoving up the value chainrsquo as a way of enhancing their service offerings protecting their outsourcing dominance and increasing their opportunities for profitability These long-term moves have important implications for client firms since they imply a shift in how client firms and business leaders engage with these outsourcers While Indian outsourcers have prepared for this shift it seems that many business leaders on the client side have not Readers will learn what to look for and copy from Indian outsourcers who have successfully enabled their business for high value-chain work and how to prepare to leverage high-value outsourcing opportunities for their firms
by nicole haggerty
the value Chain rhetoriC and reality
The last decade has brought enormous changes to the Indian outsourcing industry The high corporate IT spending of the late 90rsquos fuelled by global investments in hardware and software to cope with Y2K issues and later the dotcom bubble created important conditions for Indian outsourcers to thrive But the development of the outsourcing services industry initially focussed on low cost high quality labour This strategy has since become unsustainable in India as the inevitable pressure from alternative low-cost high-quality labour markets such as Russia the Philippines and China increases With nearly 6 percent of Indiarsquos GDP accounted for by this industry the pressure is on to change strategy
Concurrent with their successful growth over the last decade Indian vendors like Tata Wipro and TCS aware of the long-term problem of relying solely on a low
What We Can Learn From High Value Indian Outsourcers
costhigh quality advantage have sought to move into higher value-added work as a solution For at least the last 10 years an almost universal theme in the Indian marketplace has been the crucial need for vendors to ldquomove up the value chainrdquo So simultaneously with building process maturity in their outsourcing practices the last decade has also seen to varying degrees vendors who have sought to move from low value-add services like software maintenance or call centres to increasingly higher value-added services such as systems integration product development RampD market entry and consulting services Such services enable vendors to take on increasingly partnership-like strategic roles with their clients instead of being seen as mere vendors
The rhetoric of moving up the value chain has been persuasive as well as prolific But the reality bears scrutiny What does it mean to move up the value chain and how successful have Indian outsourcers been in accomplishing this crucial shift Interviews with large Indian outsourcing firms as well as an examination of academic and practitioner findings lead me to conclude first that ldquomoving up the value chainrdquo means different things to different participants in India Second Indian outsourcing firms generally have extremely sophisticated knowledge-capture ndash sharing and ndash cultivation activities These capabilities enable creativity and create a strong connection between the sales people and IT service core of their businesses which in turn creates the internal capabilities to provide high-value service Third IT-savvy business leaders have an important role to play for both outsourcers and their clients if both parties want to maximize value creation from these moves
1 the true Meaning of ldquoMoving up the value Chainrdquo
The value chain rhetoric is actually not a monolithic theme for Indian outsourcers For some it means an emphasis on the vendorrsquos internal value chain ndashundertaking process or product changes which improves the key metric or lsquothe revenue per employeersquo by decreasing headcount costs (This is a move towards non-linear growth) Implementation of mature processes
1 8
g l o b a l b u s i n e s s
like the Capabilities Maturity Model along with internal process re-engineering are some of the models for accomplishing this move which means keeping the same revenue base but decreasing employee head count to perform the same level of service This is a lsquodo more with lessrsquo strategy that focuses on employees Vish Iyer head of Asia-Pacific Operations of Tata Consultancy Services says that the goal of a non-linear growth model is to ldquoleverage our intellectual property not our head countrdquo1
For other outsourcers moving up the value chain means a focus on the external value chain thus creating knowledge-based high-value complex offerings from professional services In short this means getting paid for solutions instead of getting paid for people ndash a revenue focus This is in contrast to the historical focus of performing repeatable highly mature outsourced services across a variety of industries services that emphasized replicating and refining best practices
The effort to move up the value chain by undertaking more sophisticated more deeply strategically embedded complex offerings implies the need for a totally different set of internal capabilities in outsourcers What is crucial for success solution definition and creation includes capabilities like innovating for each project developing an internal expertise and strong processes for learning new capabilities creating tight linkages within the outsourcer between sales and service professionals and ensuring tightly woven external linkages with the business leaders on the client side rather than the IT leaders as has been typical Recent re-organizations at Infosys from a vertical market-line focus to consulting services are seen as part of its effort to accentuate and solidify its move away from a lsquotechnology companyrsquo to a solution provider S D Shibulal the new CEO of Infosys states that ldquoI clearly believe this strategy will take us closer to our vision of creating the next-generation consulting and system-integration corporationrdquo2
Infosys is not alone in focussing on service innovation In April of 2010 MindTree a mid-tier outsourcer aiming to launch a growth strategy to take its revenue base into the billions of dollars to compete with the top-tier players launched a ldquo550rdquo initiative3 Intended to create intrapreneurship amongst employees the idea is to cultivate employeesrsquo creativity to start 5 new high-value business lines that could reach $50 million revenue in 5 years Four months after launch the first incubated business idea was launched ndash digital surveillance ndash a high-value solution aimed at security organizations and government services
2 sophistiCated KnoWledge ManageMent
My second observation relates to the sophistication of knowledge ndash management activities within Indian outsourcers Next-generation knowledge-management technologies and techniques are building on the overwhelming success of social media to spur connectivity between people McKinsey reports that Indian firms surpass North American and European firms in their internal use of social media to support knowledge sharing and collaboration ndash particularly in terms of blogs wikirsquos video sharing and podcasts Such technology extensions enable the discovery aggregation and sharing of knowledge the sourcing of expertise and a reduction in costs and time for sharing innovative ideas Some Indian firms have been so successful in this activity that theyrsquove been able to commercialize their innovations into a new service offering For example Cognizant which has most of its workforce in India performing offshore outsourcing and systems integration work developed an excellent knowledge-management platform The platform called Cognizant 20 or C2 (reported in July-August 2011 Ivey Business Journal) proved so popular at Cognizantrsquos 2009 conference that clients expressed an interest in buying it Such strong knowledge-management practices facilitate the kind of knowledge work collaboration creativity and innovation required to provide excellent solution-based product offerings to clients while creating the right internal conditions to move up the value chain and extend service offerings
3 it savvy
My third observation is that a skill that appears in strong supply in Indian vendors yet is in short supply in client firms is IT savvy IT savvy is a set of behaviours knowledge structures and routines that reflect the capability to leverage technology to create business value This business capability was coined at a firm level by Peter Weill and Jeanne Ross of MIT in the book IT Savvy What Top Executives Must Know to Go from Pain to Gain However it can also be seen as a crucial individual leadership skill IT savvy helps explain the difference between firms that extract up to 20 percent more margin than their industry by effectively leveraging IT from firms who are not IT savvy and who can fall as much as 30 percent below their industry average margin because of ineffective value creation from IT investments
Indian vendors who have deployed value-chain moves that target the creation of higher-value work have developed extensive IT savvy within their organizations
1 9
g l o b a l b u s i n e s s
IT savvy business development staff appreciate the complexity of high-value services and have the knowledge to drive innovation in solution offerings for clients This IT savvy capability has also lead Indian outsourcers to create the right structures and routines to support effective internal partnerships between business development and service delivery teams something which in turn enables them to go beyond re-creating and replicating mature project work
Strong knowledge management practices investments in leadership development and training and organizational structures to support valued employee interactions are forms of sophisticated IT savvy that help Indian outsourcers create high-value solutions For example Tata Consultancy Groupsrsquo extensive use of balanced scorecards to link key strategic performance metrics to process activities in the firm helps it deliver service excellence to their clients Wipro has won numerous awards for leveraging knowledge management as a way of doing business and a business routine that is directly involved in value creation within the firm and for their customers In 2010 having won the Asian MAKE aware (Most Admired Knowledge Enterprise) Ved Prakash Chief Knowledge Officer of Wipro said
ldquoKnowledge Management in Wipro is closely aligned to business goals and this has created visible value for our stakeholders Our customers have benefited from enhanced knowledge retention organizational best practices access to wider pool of experts and cross leveraging of knowledge across different groups in Wipro This award is indeed a testimony to our efforts in this direction over the yearsrdquo4
Since excellence in knowledge management requires strong business-IT linkages it can be seen as IT savvy in the form of behaviours knowledge bases and structures which create value Unfortunately the existence of IT-savvy business leadership within the client firms is still a rarity While there are certainly exemplar firms that get IT right (see Weill and Rossrsquo IT Savvy book for great examples) the reality is that many client firms still see business-IT alignment as a problem and so continue to experience alarming IT project failures
These failures can be attributed to a lack of IT savvy in business leadership This presents a pretty substantial problem for outsourcers since their new value-chain model requires them to move up the client chain as well and start engaging client-side business people more actively during the consulting especially on the high-value service-development and the service-delivery phases But while Indian outsourcers need IT-savvy
business people to partner with within their clients finding them is another matter
Thus the value-chain rhetoric has produced some important opportunities in terms of high-value service offerings and best practices of which Western firms can take advantage These include consulting RampD and systems integration services and work practices like sophisticated knowledge management and IT-savvy business leadership Below are some specific suggestions for learning from these high-value outsourcers
What Can you learn froM high value indian outsourCers
There are several things we can learn from high-value Indian outsourcers which may or may not be related to using their outsourcing services From a management practice standpoint there is much to be learned from their sophisticated level of knowledge management including expanded opportunities for deploying social media tools We can also learn from their internal practices which have developed a strong internal IT-savvy capability ndash a crucial capability in a world where technology touches almost everything firms do With these practices strengthened client firms will have laid a stronger foundation for better partnerships with high-value outsourcers who develop and deliver complex consulting and valuable solutions instead of mere transactions In some respects this implies that for the high-value chain strategy to pay off Indian outsourcing firms need clients who are mature enough and internally aligned enough to be ready for such partnerships
As mentioned Indian firms lead North America and Europe in their use of social media in the firm especially for cultivating value-creating knowledge management activities More firms need to study and copy these practices Some are already innovating along these lines For example Best Buy and Intel are leveraging wikis Twitter RSS internal Facebook-like social networks blogs even prediction markets and open innovation techniques But judging by the internal social mediasocial computing adoption rates more firms need to be copying Best Buy and Intel if they are to reap the benefits of strong internal collaboration and content refinement that users undertake
Beyond typical KM technology implementations to govern vast storehouses of content and to enable email like interaction social media KM extends the visibility of networks which helps source the right expertise Such visibility also creates more lsquoprocessedrsquo user-generated content beyond uploaded PowerPoint presentations
2 0
Blogs wiki-based collaborations user content tagging and RSS feeds allow users to create their own content to find similar content in search terms that are meaningful to them and push out relevant news that they control In moving up the value chain to more knowledge-intensive innovation-demanding forms of services high-value Indian outsourcers have learned much that they can teach us about developing these universally important managerial tools processes and capabilities
With respect to IT-savvy in business leadership firms should seek to improve their own leveraging of IT As mentioned IT-savvy firms and business leaders undertake certain behaviours develop certain types of knowledge and create structures and routines which bind business and IT together Typical IT-savvy business leader behaviours are personal attendance at IT governance meetings accepting cross-appointments between IT and the business accepting personal responsibility for designing business processes and assuming responsibility and accountability for IT spending and value creation
IT-savvy business knowledge includes process standardization and integration competence knowledge or enterprise architecture and strategy enablement proper business-case development and systems and data reliability and governance
IT-savvy business structures and routines that can be implemented to enhance knowledge and behaviour effectiveness include defined business roles and responsibilities for IT reward systems training governance and decision rights which separate infrastructure from applications and business roles for scanning and technology updating5
High-value Indian outsourcers have had to develop these capabilities out of necessity To survive and thrive in the highly competitive outsourcing industry they needed to develop superior capabilities to manage client relationships and to create new business solutions We can learn a lot about develop IT savvy business leaders at home from their activities
readying yourself for leveraging high value Chain opportunities
With sophisticated knowledge sharing and IT savvy in place client firms who chose to do so will be prepared to collaborate and innovate new ways of doing high value-added work with Indian outsourcers Activities like systems integration end-to-end business solution development and deployment RampD market entry and
product development are a just a few of the current offerings in which many Indian outsourcers are striving to develop strong portfolios of services
The success of such ventures is predicated on effective collaboration between IT-savvy business leaders at client firms and the outsourcer However this remains a large stumbling block for Indian outsourcers In order to move up the value chain Indian outsourcers must move away from typical partnerships with their clientrsquos IT leadership and staff and towards strong relationships with IT-savvy business leaders who are prepared to collaborate and learn from them Itrsquos time to recognize that Indian outsourcers are not just service providers but sophisticated organizations with strong practices that we can learn from and leverage They know what they are doing Do you
The Author
nicole haggerty is an Associate Professor at the Richard Ivey School of Business
references
bull httpwwwbusinessweekcommagazinecontent11_23b4231013802754htm Indiarsquos Scarce Talent Rising Wages Balky Clients viewed August 26th 2011
bull httponlinewsjcomarticleSB10001424053111903327904576523381357412872html Infosys CEO Clients May Cut Technology Budgets Viewed August 23 2011
bull httpwwwbusiness-standardcomindianewsmindtree-incubates-employees-idea-to-launch-new-business405605 Mindtree Incubates Employee Ideas to Launch New Businesses viewed August 26th 2011
bull httpwwwconsultant-newscomarticle_displayaspxp=adpampid=7270 Wipro Technology Wins Asian MAKE Award 2010 Viewed August 30th 2011
bull Weill P and J Ross 2009 IT Savvy What Top Executives Must Know to go from Pain to Gain Harvard Business Press Boston Massachusetts
g l o b a l b u s i n e s s
2 12 1
Leadership
2 2
l e a d e r s h i p
The sum of virtues values and traits equals good character which in addition to competence and commitment is one of the three ingredients that make a leader effective and respected For many however virtues values and traits remain indefinable even elusive These authors not only define them they also de-construct them in the process demonstrating how character fuels people in their personal journeys to become better leaders
by Mary Crossan Jeffrey gandz and gerard seijts
In assessing leaders at any level in an organization we must always ask three questions bull Do they have the competencies to be a leader Do they have the knowledge the understanding of key concepts facts and relationships that they need to do the job effectively
bull Do they have the commitment to be a leader Yes they aspire to be a leader but are they prepared to do the hard work of leadership engage with others in fulfilling the organizational mission achieve the vision and deliver on the goals
Developing Leadership Character
bull Do they have the character to be a good leader and strive to be an even better one Do they have the values traits and virtues that others ndash shareholders employees customers suppliers regulators and the broader society within which they operate ndash will use to determine if they are good leaders
We have documented previously the types of knowledge skills understanding and judgment that leaders need grouping them into four competencies ndash strategic business organizational and people[1] Underpinning these competencies is general intellect (see Figure 1) We have also talked elsewhere about the importance of leaders having the commitment to lead and the problems that are caused when people in leadership roles no longer want to do the hard work of leadership and become disengaged from what is happening in the organization while they still enjoy the status privileges and perks of office In this article we want to focus on leadership character not because it is necessarily more important than competencies and commitment but because it is the most difficult to define measure assess and develop Our intent is to define those dimensions of leadership character that are most important in todayrsquos rapidly changing and turbulent business environment and suggest how character can be developed
KNOWLEDGEFacts figures concepts
etc
UNDERSTANDINGRelationships context
significance materiality etc
SKILLSAnalyzing decision-making
communicating getting things done teaming etc
JUDGMENTUsing intuition timing
methods to use who to involve how to do it etc
figure 1 leadership Competencies Character and Commitment
People Competencies
Character bull Traits bull Values bull Virtues
Commitment bull Aspiration bull Engagement bull SacrificeBusiness
Competencies
Organizational Competencies
Strategic Competencies
Intellect
Competencies
Competencies
+ +
2 3
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Why CharaCter Matters
In any bookstore you will find dozens of books on leadership style far fewer on leadership competencies and fewer still that address leadership character [2] For some reason we have lost sight of character Perhaps this is because our educational system and organizations are so competency focused perhaps because we just donrsquot know what to think about character perhaps because character seems such an old-fashioned word perhaps because we are reluctant to discuss examples of poor character with our colleagues in the workplace or because we believe we cannot assess character objectively
Yet character is such a central important element of leadership mdash particularly for the kind of cross-enterprise leadership that is essential in complex global business organizations mdash that it should not and cannot be ignored Character fundamentally shapes how we engage the world around us what we notice what we reinforce who we engage in conversation what we value what we choose to act on how we decidehellipand the list goes on
Our own research on the failures of leadership points to issues around character as a central theme[3] Nowhere was this more obvious than in the financial crisis of 2008 ndash 2009 in which boldness or instant gratification triumphed over temperance People who knew that bad risks were being taken did not have the courage andor confidence to speak up and people without integrity sold mortgages to those who could not pay them They then bundled these mortgages into securities that were fraudulent and sold to others People with large egos lacking in humility oblivious to the harm they may have been be doing to others or the societies in which they operated became very rich at the expense of millions who were the victims of the financial crisis and subsequent recession Yet to this day these same people seem unable or unwilling to accept any degree of responsibility for their actions Leaders of large global companies knew about these types of practices yet did nothing to stop them Still others were unable to create the honest transparent corporate culture that would enable them to be in touch with what was happening deep down in the organization All these behaviors and activities were essentially failings of character
defining CharaCter
There is no consensus on a definition of character In fact there seems to be as many definitions as there are scholars whose research and writing focus on character [4] In our discussion of character we focus on personality traits values and virtues
traits
Traits are defined as habitual patterns of thought behavior and emotion that are considered to be relatively stable in individuals across situations and over time Traits are not fixed For example introverts may be able to learn how to behave in a less introverted way while extroverts may learn how to control and moderate their extroverted behaviors when situations require it
There are literally hundreds of personality traits from A (ambition) to Z (zealousness) that have been described in the psychology literature However through statistical techniques such as factor analysis five broad domains or dimensions of personality have emerged and are now widely used in various forms in employee selection and assessment [5] The ldquoBig-Fiverdquo traits are bull Conscientiousness bull Openness to experience bull Extroversion bull Agreeableness and bull Neuroticism
These five traits feature prominently in tests or inventories and they have come to be known as the FFM or the five-factor model a robust model of personality Although the Big Five dominate the personality literature there are various other traits that warrant consideration and measurement such as self-confidence ambition perfectionism dominance rigidity persistence and impulsivity
Some personality traits can be inherited For example studies have shown that identical twins that have the same genes show more traits that are similar than non-identical twins Traits of course also evolve through life experiences and deliberate developmental exercises such as coaching
values
Values are beliefs that people have about what is important or worthwhile to them Values influence behavior because people seek more of what they value If they can get more net value by behaving in certain ways they will Values therefore can be seen as the guideposts for behavior Some people value their autonomy very highly some value social interaction some value the opportunity to be creative some value work-life balance and so on Values may change with life stages and according to the extent to which a particular value has already been realized For example a new graduate strapped by student loans may value a high starting salary That same person 30 years later may well pass up a high-paying job for one that paid less but allowed him
2 4
to live close to his grandchildren or somewhere with greater access to recreational activities
An individualrsquos values are in large part derived from the social environment in which he or she lives[6] In Western democracies life liberty and the pursuit of happiness are some of the things we value Other societies value order harmony non-violence and equality If we are brought up with strong religious traditions some of us develop values based on the teachings of those religions Similarly our value frameworks may be influenced by our home life fraternal societies we join experiences obtaining an education the companies we work for our friends and many other social influences
An important sub-set of values consists of those with ethical or social dimensions such as honesty integrity compassion fairness charity and social responsibility Such moral values may be strongly or weakly held and influence behavior accordingly
Values may be espoused though they may not necessarily be manifested For example itrsquos not unusual for people to experience value conflicts in certain situations When loyalty conflicts with honesty when fairness conflicts with pragmatism or when social responsibility conflicts with obligation to shareholders people become conflicted And when their actions are inconsistent with their values they either experience guilt anger and embarrassment People try to minimize such cognitive dissonance by rationalizing or even denying their behavior discounting the consequences of it or simply blaming others
virtues
From the time of the ancient Greeks philosophers have defined certain clusters of traits values and behaviors as ldquogoodrdquo and referred to them as virtues Virtues are like behavioral habits ndash something that is exhibited fairly consistently For example Aristotle wrote that ldquoWe are what we repeatedly do Excellence then is not an act but a habitrdquo
Aristotle identified and defined twelve virtues Courage Temperance Generosity Magnificence Magnanimity Right ambition Good temper Friendliness Truthfulness Wit and Justice The twelfth virtue is Practical Wisdom which is necessary to live the ldquogood liferdquo and thus achieve happiness or well being
Consider the virtue of Courage Traits such as openness to experience self-confidence and persistence contribute to individuals acting in distinctive ways ndash for example
putting themselves on the line and acting in a courageous fashion Having values such as integrity treating individuals with respect and achievement predisposes individuals to demonstrate courageous behavior Furthermore a person with integrity tends to act in a different way than a person who lacks integrity even if both individuals find themselves in the same situation Then there is a set of actual behaviors that individuals engage in ndash on a fairly consistent basis (meaning across situations and over time) ndash and that friends colleagues and observers characterize or describe as courageous These behaviors may have become societal expectations
the ten virtues of a Cross-enterprise leader
We propose that cross-enterprise leaders who focus on the long-term performance of their organizations must demonstrate ten virtues (as shown in Figure 2)[7]
bull Humility is essential to learning and becoming a better leader
bull Integrity is essential to building trust and encouraging others to collaborate
bull Collaboration enables teamwork
bull Justice yields decisions that are accepted as legitimate and reasonable by others
bull Courage helps leaders make difficult decisions and challenge the decisions or actions of others
bull Temperance ensures that leaders take reasonable risks
bull Accountability ensures that leaders own and commit to the decisions they make and encourages the same in others
bull Humanity builds empathy and understanding of others
bull Transcendence equips the leader with a sense of optimism and purpose
bull Judgment allows leaders to balance and integrate these virtues in ways that serve the needs of multiple stakeholders in and outside their organizations
l e a d e r s h i p
2 5
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JudgementBalance perspective
situational awareness managing ambiguity amp paradoxes
humanityConsideration empathy
caring compassion gratitude
transCendenCeOptimism far-sightedness
big-picture thinking forgiveness
temperanCeprudence self-control restraint
forgiveness
integrity honesty authenticity
transparency principled walking the talk
COllaBOratiOnConsultation cooperation
agreeableness
aCCOuntaBility Ownership stewardship
responsibility dependability
humilityOpen-mindedness modesty receptivity to othersrsquo ideas
and views
JustiCeFairness objectivity impartiality
COurageBravery confidence
perseverance tenacity
CharaCter
figure 2 ten leadership virtues
But if you consider what may happen when leaders lack these virtues the effects become more obvious (see Table 1 below)
bull Without Judgment leaders make flawed decisions especially when they must act quickly in ambiguous situations namely when faced with the many paradoxes that confront all leaders from time to time
bull Without Humanity leaders are unable to relate to others see situations from their followersrsquo perspectives or take into account the impact of their decisions on others Without humanity leaders will not act in socially responsible ways ndash they will alienate people
bull Without a Sense of Justice leaders are unable to understand the issues of social inequality and the challenges associated with fairness Such leaders act in unfair ways and reap negative consequences in the form of poor employee relations or reactions by customers governments and regulators People will rebel and find ways to undermine the leader
bull Without Courage leaders will not stand up to poor decisions made by others and will lack the perseverance and tenacity required to work through difficult issues They will also back down in the face of adversity and choose the easy route But in doing so they only postpone the inevitable
bull Without Collaboration leaders will fail to achieve those worthwhile goals that require more than individual effort and skills They donrsquot use the
diversity of othersrsquo knowledge experience perceptions judgments and skills to make better decisions and to execute them better Friction among different stakeholders results and relations deteriorate
bull Without Accountability leaders donrsquot commit to or own the decisions they make and cannot get others to do so They blame others for poor outcomes and in doing so create a culture of fear and disengagement People stop caring with potentially disastrous consequences
bull Without Humility leaders cannot be open-minded and solicit and consider the views of others They canrsquot learn from others they canrsquot reflect critically on their failures and become better leaders as a result of those reflections They become caricatures of themselves Isolation results
bull Without Integrity leaders cannot build good relationships with followers with their organizational superiors with allies or partners Every promise has to be guaranteed and the resulting mistrust slows down decisions and actions
bull Without Temperance leaders take uncalculated risks rush to judgment fail to gather relevant facts have no sense of proportion and make frequent and damaging changes or even reverse important decisions Their credibility suffers
bull Without Transcendence leadersrsquo goals become narrow and they fail to elevate discussions to higher-order goals They donrsquot see the bigger picture and hence their decisions may reflect opportunism only They donrsquot think outside the box or encourage others to do so
Aristotle was clear in stating that virtues become vices in their excess or deficiency[8] Courage in its excess is recklessness while in its deficiency it is cowardice Collaboration in excess ungoverned by judgment as to when it will result in benefits leads to numerous unproductive meetings and organizational inefficiency But without it teamwork is difficult or impossible Too much humility may lead followers to question the leaderrsquos toughness resulting in a lack of confidence But without it leaders make ill-advised decisions and are unable to learn Transcendence in excess can result in leaders becoming vacuous visionaries unable to focus on the here and now and the more mundane decisions that need to be made But without transcendence leaders focus on narrow short-term goals
2 6
table 1 good and bad outcomes of presence or absence of virtues
by nature they are able to keep a confidence or secret when it is appropriate to do so While they may be courageous they will understand which battles to fight and which to avoid
CharaCter developMent
Individuals can develop their own character strengths leaders can help followers develop their character and organizations can and should enable character development to take place
how character develops
Some dimensions of character specifically some traits are inherited Virtues values and many other traits are developed during early childhood and modified as a result of education family influences early role models work and social experiences and other life events
The early philosophers viewed character as something that is formed subconsciously through repetitive behavior that is either rewarded or by finding what works through experience The habit of character is formed along with a myriad of other habits which both enable and constrain us and that can be both productive and counterproductive The interesting thing about habits is that we are often unaware of them Therersquos a famous saying that illustrates this point rather
Temperance or Justice in excess may lead to extreme risk aversion and paralysis in decision-making without them reckless or grossly unfair decisions are made Even extreme Accountability may subvert required actions when the penalties for failure are unreasonable or extreme but without it empowerment and delegation are not possible Humanity in excess may lead to the neglect of shareholdersrsquo interests but in its absence employee loyalty and commitment will suffer Judgment under conditions of uncertainty or ambiguity is the essential requirement of organizational leadership but excessive judgment may lead to indecisiveness or dithering Even an excess of integrity can lead to self-righteousness and total inflexibility but organizations could not function without rules and regulations that set boundaries The challenge for leaders therefore is to deepen or strengthen a virtue through reflection and hence avoid turning a virtue such as Courage into the vice of excess (Recklessness) or a lack of it (Cowardice)
Psychologists sociologists organizational theorists and others who study behavior in organizations have been interested in traits values and virtues associated with good leadership Virtuous leaders are influenced by their traits and values but they balance and integrate them in ways that are appropriate to the situations in which they operate For example while leaders may be transparent
l e a d e r s h i p
Virtue Good Organizational Outcomes (Virtue is present) Bad Organizational Outcomes (Virtue is absent)
Judgment Quality decisions calculated risk-taking commitment support trust
lack a balanced assessment of the issues leading to misinformed decisions confusion resistance to change
Humanity social responsibility good employee relations understanding support
misses critical social implications of decisions and actions alienation of followers lack of respect for leader
Justice use diversity good employee relations fairness organizational citizenship behaviours
inequities not identified and managed thereby eroding trust Favouritism nepotism
Courage decisions made under conditions of uncertainty confidence to act opposition to potentially bad decisions innovation
going along with poor decisions satisficing rather than maximizing moral muteness
Collaboration teamwork use diversity cross-enterprise value-added innovation learning affiliation confidence
individualism alienates potential allies poor understanding of decisions friction conflict
Accountability Ownership and commitment to decisions and their execution
Failure to deliver results and typically creates excuses why not shirking of responsibility
Humility Continuous learning quality decisions respect trust ego-driven behaviour elective listening difficulty admitting error or failure arrogance overconfidence complacency hubris
Integrity Builds trust reduces uncertainty develops partnerships and alliances promotes collaboration and cooperation
Creates mistrust requires firm guarantees slows down action undermines partnerships and alliances reduces cooperation and collaboration
Temperance Quality decisions reduced risk short-termism inability to see the possible constraints instant gratification
Transcendence Focus on subordinate goals big-picture thinking strive for excellence
narrow aims little inspiration tunnel vision
2 7
well ndash ldquoWatch your thoughts for they become words Watch your words for they become actions Watch your actions for they become habits Watch your habits for they become character Watch your character for it becomes your destinyrdquo (author unknown)
As Robert Kegan a developmental psychologist said we need ldquoto resist our tendencies to make right or true that which is merely familiar and wrong or false that which is only strangerdquo[9] At the core of this capacity is character hence character shapes thoughts words actions and so on Yet habits may prevent the development of character For example a strong ego that has been built to defend onersquos identity makes it difficult to develop humility and thus be open to learning experiences So when people believe that character is developed at an early age they are in part correct since there comes a time when habits are difficult to break It is not surprising then that it often takes profound life events to liberate us from the cages we have constructed for ourselves
These ldquocruciblerdquo events have a significant influence on the traits and values that are part of character Some of these events force people to confront the impact of their trait-and value-driven behaviors and their self-concept of virtuosity Being fired having your work praised or criticized being passed over for a promotion or being promoted when you didnrsquot think you were ready for it finding yourself disadvantaged through a bossrsquos unfair assessment or being accused of harassment plagiarism or other forms of unethical behavior are all examples of events that can shape character
Less dramatic but no less important are those events that reinforce good character The acknowledgement praise recognition or reward that come to people for doing the right thing or acting in the right way are critical to character development especially when offered during an individualrsquos formative years Selection for a valued assignment or a promotion further reinforces such behaviors and hence the development of character
Even normal everyday occurrences offer the opportunity for character development since it is not something separate from onersquos job or life but rather a part of them Reflection about why you might be impatient excessive stubborn or careless provides the raw material for examining and developing character
senior leadership and organizational commitment to character development
There is much that senior leaders in organizations can do to develop leadership character in others
Simply talking about character making it a legitimate and valued topic of conversation stimulates discussion and facilitates individual reflection When organizations develop leadership profiles and address leadership character in those profiles they emphasize the importance of leadership and promote discussion of it especially in the context of developmental coaching Conversely when leadership profiles only address competencies and commitment they implicitly if unintentionally suggest that character is not important
Even explicit values statements in organizations often turn out to be nothing more than posters or plaques on the wall Unless they are formulated in the context of the work that people are doing and in a meaningful way they tend to be ignored Anything that senior management attends to is considered important anything ignored is marginalized For the most part people do not learn values and virtues by osmosis Values need to be addressed explicitly in the organizationrsquos coaching and mentoring reinforced through training and development and actively used in recruitment selection and succession management
personal Commitment to Character building
Warren Bennis addressed the role of individual responsibility in becoming a better leader when he said ldquoThe leader never lies to himself especially about himself knows his flaws as well as his assets and deals with them directly You are your own raw material When you know what you consist of and what you want to make of it then you can invent yourselfrdquo[10] This is relevant to leadership character as much as it is to competencies and commitment It requires a degree of self-awareness a preparedness to examine habitual behaviors and consider whether there may not be better ways of leading than the ones that have worked more or less for you in the past We limit our development as leaders by not having the discipline and courage to assess ourselves honestly
Why CharaCter really Matters
When it comes to leadership competencies determine what a person can do Commitment determines what they want to do and character determines what they will do
Character is foundational for effective decision-making Clearly mistakes are made because of a leaderrsquos shortcomings in his or her competencies More often the root cause is a failing of character For example not recognizing or not willing to admit that you donrsquot have the requisite competencies to succeed in the leadership
l e a d e r s h i p
2 8
role is rooted in character Not willing to listen to those who can do well because of the perception that it would undermine your leadership is a problem rooted in character Challenging decisions being made by others but which you feel are wrong requires character Dealing with discriminatory behaviors by others requires character Creating a culture of constructive dissent so that others may challenge your decisions without fear of consequences requires character
The question is not really why character matters but why it does not get the attention and respect it warrants For character to find the spotlight it deserves leaders need to illuminate it We can see some light shed in organizational statements of values and leadership competencies but the practice is not widespread We believe organizations should move beyond statements of organizational values to anchor leadership development in profiles that define what makes a leader good in addition to defining what good leaders do and how they can lead better
Character is not something that you have or donrsquot have All of us have character but the key is the depth of development of each facet of character that enables us to lead in a holistic way Character is not a light switch that can be turned on and off There are degrees and every situation presents a different experience and opportunity to learn and deepen character In particular and for better or for worse character comes to the fore when managing a crisis No one is perfect when it comes to character and given that its development is a lifelong journey we will rise to the occasion in some situations and disappoint ourselves and those around us in others
Numerous examples come to mind where good people do inappropriate things They get derailed because they stop listening they become overconfident in their decision-making skills they become blind to important contextual variables their emotions hijack their self-control and so forth Even good people are fallible But since we tend to judge ourselves by our intentions and others by their behavior it is easy to become jaded about character How could someone preach one thing and do another The point is that in this lifelong journey we need to appreciate what it takes to develop the habits around character and to enable the conversations within ourselves and with others that strengthen rather than undermine character
Competencies count character matters and commitment to the leadership role is critical to the leaderrsquos success Our experience is that a renewed focus on character sparks the best in people and fuels them in their personal
journeys to become better leaders We see the process of learning to lead as a journey that enables people to bring the best of themselves to support and enable others ensure that the organizations they work with perform at the highest level and in doing so contribute to the society in which they operate
The Authors
Mary CrossanMary Crossan is Professor of Strategic Management and the TaylorMingay Chair in Business Policy at the Richard Ivey School of Business University of Western Ontario
Jeffrey gandzJeffrey Gandz is Professor Managing Director ndash Program Design Executive Development Richard Ivey School of Business
gerard seijtsGerard Seijts is Associate Professor Faculty Director City of London Management Foundations Program Ivey Alumni AssociationToronto Faculty Fellow in Business Leadership and Faculty Scholar Richard Ivey School of Business University of Western Ontario
references
bull [1] For further information on these leadership competencies see ldquoThe cross-enterprise leaderrdquo by Mary Crossan Jeffrey Gandz and Gerard Seijts Ivey Business Journal JulyAugust 2008
bull [2]Titles of books on leadership and character include Questions of character Illuminating the heart of leadership through literature The character of leadership Nine qualities that define great leaders and Inspiring leadership Character and ethics matter
bull [3] For more information see ldquoLeadership on trial A manifesto for leadership developmentrdquo by Jeffrey Gandz Mary Crossan Gerard Seijts and Carol Stephenson with Daina Mazutis 2010 httpwwwiveyuwocaresearchleadershipresearchbooks-and-reportshtm
bull [4] This conclusion was reached by Jay Conger and George P Hollenbeck in a special issue of Consulting Psychology Journal Practice and Research (2010 62 4 311-316) on defining and measuring character in leadership
bull [5] Examples of such tests include the Myers-Briggs Type Inventory the Minnesota Multiphasic Personality Test the 16 Personality Factors the Personal Style Indicator and many others
bull [6] Rokeach M (1973) The nature of human values New York NY Free Press Schwartz S (1992) Universals in the content and structure of values Theoretical advances and empirical tests in 20 countries Advances in Experimental Social Psychology 25 1ndash66
bull [7] Our thinking draws heavily on work by Peterson and Seligman ldquoCharacter strengths and virtuesrdquo (2004) who identified six virtues (Wisdom Transcendence Humanity Temperance Transcendence and Courage) after extensive consideration of traits and behaviors empirically identified among leaders We have added four others that we feel reflect virtues considered to be important in cross-enterprise leaders (Collaboration Confidence Humility and Accountability) and modified Wisdom to the more commonly used Judgment
bull [8] This follows the argument of Aristotle in the Nicomachean Ethics Book 3 Chapter 1 While he was describing a limited number of virtues we believe that his reasoning applies to our extended set
bull [9] From the speech by Matthew Taylor on 21st century enlightenment httpwwwyoutubecomwatchv=AC7ANGMy0yo
bull [10] Bennis Warren (1989) On becoming a leader New York NY Random House Business Books
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Emerging findings in neuroscience research suggest why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others Insights such as these this author writes may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation Readers will learn about this and other important findings in neuroscience that have the potential to tell us what we need to know to be good even great leaders
by richard boyatzis
The quest for understanding leadership seems perpetual Against the context of the daily news that is full of leadership failures and lost opportunities it seems to be an area of mystery rather than understanding Advances in neuroscience may help us understand the internal mechanisms that enable some people to be effective leaders and some not It will help us to know how some people can form effective leadership relationships and some not It will also help us to understand why some people can sustain their effectiveness and others can not But we are not there yet
Leaders engage and inspire others ndash that is how their work gets done For the last 100 or so years we have studied their personality intelligence values attitudes and even behavior But seldom has anyone ventured physiologically inside of leaders Advances in fMRI (functional magnetic resonance imaging) access to people and machines and interest in more holistic approaches to studying leadership have made this possible This has become so popular and hot that a special issue of Leadership Quarterly was dedicated to the Biology of Leadership (Senior Lee amp Butler 2010) In this brief overview I will use a few of our current studies to highlight some of the areas that seem to hold promise
Neuroscience and Leadership The Promise of Insights
building relationships
Leaders need to build relationships that inspire and motivate others to do their best innovate and adapt In our earlier work Primal Leadership (Goleman Boyatzis amp McKee 2002) and Resonant Leadership (Boyatzis amp McKee 2005) we synthesized a great deal of research to support the idea that effective leaders build resonant relationships with those around them At the same time less effective leaders or those that are more one-sided seem to create dissonant relationships We decided to explore this in one fMRI study
A study was designed to explore the neural mechanisms invoked as a result of relationships with resonant high-leader member exchange (ie LMX) high-quality relationship leaders and dissonant lo ndash LMX low-quality relationship leaders (Boyatzis Passarelli Koenig Lowe Mathew Stoller amp Phillips in review) Middle-aged subjects were asked about critical incidents with leaders in their experiences fMRI scans were conducted with cues developed from these experiences
In this exploratory study preliminary observations revealed that recalling specific experiences with resonant leaders significantly activated 14 regions of interest in the brain while dissonant leaders activated 6 and deactivated 11 regions Experiences with resonant leaders activated neural systems involved in arousing attention (ie anterior cingulate cortex) the social or default network (ie right inferior frontal gyrus) mirror system (ie the right inferior parietal lobe) and other regions associated with approach relationships (ie the right putamen and bilateral insula) Meanwhile dissonant leaders deactivated systems involved in social or default networks (ie the posterior cingulate cortex) the mirror system (ie the left inferior frontal gyrus) and activated those regions associated with narrowing attention (ie bilateral anterior cingulate cortex) and those associated with less compassion (ie left posterior cingulate cortex) more negative emotions (ie posterior inferior frontal gyrus)
With creative designs future research can probe the neural activations that various relationships and people have had on us We can begin to understand how they may be affecting our moods and cognitive openness
l e a d e r s h i p
3 0
possible iMpliCations
In Primal Leadership Resonant Leadership and a more recent article in Harvard Business Review (Goleman amp Boyatzis 2008) we offered many examples of leaders who build resonant relationships with others around them mdash many others around them And dissonant leaders who seem to turn people off alienate them and lose their motivation The neuroscience findings emerging suggest a basic reason why inspiring and supportive relationships are important mdash they help activate openness to new ideas and a more social orientation to others
These insights may move the primacy of a leaderrsquos actions away from the often proselytized ldquoresults-orientationrdquo toward a relationship orientation This does not preclude the concern with results but could show why being first and foremost concerned about onersquos relationships may then enable others to perform better and more innovativelyndash and lead to better results John Chambers of Cisco Systems and Oprah Winfrey of Harpo Productions are both driven to produce impressive results But when people who work directly with them talk about their meetings they walk out of them motivated and inspired by what they are doing and their commitment to each other
eMotional Contagion and eMpathy
While most people will acknowledge the role of empathy in understanding others few appreciate how quickly impressions of others get formed or the neural mechanisms involved For this we must look to the research on contagion Prior research has explained mimicry and imitation (Hatfield Cacioppo amp Rapson 1993) But recent studies although somewhat controversial offer three possibilities regarding emotional contagion (1) emotional contagion spreads in milliseconds below conscious recognition (LeDoux 2002) (2) emotional arousal may precede conceptualization of the event (Iacoboni 2009) and (3) neural systems activate endocrine systems that in turn activate neural systems (Garcia-Segura 2009)
The mirror neuron system has been claimed to foster imitation and mimicry (Cattaneo amp Rizzolatti 2009) This system allows us to discern the (a) context of an observed action or setting (b) the action and (c) the intention of the other living being They help us to understand the sensing of the goalsintention of anotherrsquos actions or expressions and to link sensory and motor representation of them Even the most recent approaches to emotional contagion that do not focus on the mirror system claim to show a sympathetic hemo-dynamic that creates the same ability for us to relate to anotherrsquos emotions and intention (Decety amp Michalaks 2010)
Relevant to leadership there are three implications of these observations the speed of activation the sequence of activation and the endocrineneural system interactions The firing of the limbic system seems to occur within 8 milliseconds of a primary cognition and it takes almost 40 milliseconds for that same circuit to appear in the neocortex for interpretation and conceptualization (LeDoux 2002) With this timing our emotions are determining cognitive interpretation more than previously admitted Once primary cognitions have occurred secondary cognitions allow for the neocortical events (ie reframing) to drive subsequent limbic or emotional labeling Our unconscious emotional states are arousing emotions in those with whom we interact before we or they know it And it spreads from these interactions to others
Research has suggested that negative emotions are stronger than positive emotions (Baumeister Bratslavsky Finkenauer amp Vohs 2001) As a result we would suspect that the contagion of negative emotion would ignite a stronger neural sequence than positive emotions This may serve evolutionary functions but paradoxically it may limit learning Arousal of strong negative emotions stimulates the Sympathetic Nervous System which inhibits access to existing neural circuits and invokes cognitive emotional and perceptual impairment (Sapolsky 2004 Schulkin 1999 Dickerson and Kemeny 2004)
The benefits of arousing positive emotions over negative ones have been demonstrated by Fredrickson and Losada (2004) and others A contagion of positive emotions seems to arouse the Parasympathetic Nervous System which stimulates adult neurogenesis (ie growth of new neurons) (Erickson et al 1998) a sense of well being better immune system functioning and cognitive emotional and perceptual openness (McEwen 1998 Janig and Habler 1999 Boyatzis Jack Cesaro Passarelli amp Khawaja 2010)
The sustainability of leadership effectiveness is directly a function of a personrsquos ability to adapt and activate neural plasticity The SNS and PNS are both needed for human functioning They each have an impact on neural plasticity Arousal affects the growth of the size and shape of our brain Neurogenesis allows the human to build new neurons The endocrines aroused in the PNS allow the immune system to function at its best to help preserve existing tissue (Dickerson and Kemeny 2004)
possible iMpliCations
The most likely implication of these results is that leaders bear the primary responsibility for knowing what they are feeling and therefore managing the contagion that
l e a d e r s h i p
3 1
they infect in others It requires a heightened emotional self-awareness This means having techniques to notice the feelings (ie know that you are having feelings and become aware of them) label or understand what they are (ie giving a label to vague or gnawing sensations) and then signal yourself that you should do something to change your mood and state Merely saying to yourself that you will ldquoput on a happy facerdquo does not hide the fast and unconscious transmission of your real feelings to others around you
You are infecting others around you with specific feelings Some of those feelings help them to perform better and innovate and some are debilitating and inhibit adaptive thinking Remember negative feelings even the unconscious ones will easily overwhelm positive ones The leader because of hisher position of power has a greater affect on others in a social or work environment Being able to change your internal state might be one of the most powerful techniques you learn in becoming an effective leaderndash one who inspires others to learn adapt and perform at their best
helping and inspiring others
Leaders should be coaches in helping to motivate and inspire those around them (Boyatzis Smith amp Blaize 2006) But not any old form of coaching will help Coaching others with compassion that is toward the Positive Emotional Attractor appears to activate neural systems that help a person open themselves to new possibilitiesndash to learn and adapt Meanwhile the more typical coaching of others to change in imposed ways (ie trying to get them to conform to the views of the boss) may create an arousal of the SNS and puts the person in a defensive posture This moves a person toward the Negative Emotional Attractor and to being more closed to possibilities We decided to test this difference
In a study sophomores were coached with each approach (Boyatzis Jack Cesaro Khawaja amp Passarelli 2010) On the basis of two 30 minutes coaching sessions one to the PEA (asking a person about their future dreams) and the other to the NEA (asking them how they are handling their courses and whether they are doing all of their homework) we found dramatic differences in neural activation Using an fMRI to track neural activity it showed significant differences in activation as a result of these two approaches to coaching We found activation of the orbito-frontal cortex and nucleus accumbens to be positively related to PEA coaching This also activated a part of the visual cortex in which a person can imagine and visualize something These are associated with PNS arousal Meanwhile the NEA
seemed to activate the Anterior Cingulate Cortex and Medial Prefrontal Cortex both regions known for self-consciousness and reflections while feeling guilt
These results were consistent with those from Jack Dawson Ciccia Cesaro Barry Snyder amp Begany (2010) showing that there is a network of brain regions activated when engaged in social activities (formerly called the Default Motor Network in the neuroscience literature) There is a dramatically different network that is activated when you are engaged in analytics or trying to solve a non-social problem They showed that these two networks suppress each other That is when you are busy thinking about budgets financial analysis or product specifications you will have turned off the parts of your brain that are key to social functioningndash and visa versa
possible iMpliCations
If you believe that leadership involves inspiring others and motivating them to be their best and develop learn adapt and innovate then activating the parts of their brain that will help requires arousing what we have called the Positive Emotional Attractor To arouse the PEA these studies are suggesting that we need to (1) be social and (2) engage the person in positive hopeful contemplation of a desired future The latter might also be stimulated when discussing core values and the purpose of the organization or project All too often people in leadership positions begin conversations about the financials or metrics and dashboard measures of the desired performance These findings suggest that while important this sequence confuses people and actually results in them closing down cognitively emotionally and perceptually If you want them to open their minds you need to discuss the purpose of the activity (not merely the goals) and the vision of the organization or clients if a desired future were to occur THEN you can lead a discussion about the financials metrics and measures But you have made it clear that the measures follow the purpose they have not become the purpose
If this sounds like transformational leadership versus its less effective sibling transactional leadership you have made an important connection But our research shows that you need to arouse the PEA and the NEA to get sustained desired change The key appears to be so far in our research that you need to (1) arouse the PEA first and (2) arouse the PEA sufficiently such that it is about three to six times more frequent in the discussions than the NEA
Findings such as these may help us to understand if replicated how to help othersndash and how to help us sustain our effectiveness as leaders
l e a d e r s h i p
3 2
The Author
richard boyatzisRichard Boyatzis is Professor in the Departments of Organizational Behavior Psychology and Cognitive Science at Case Western Reserve University He is the author of 6 books including Primal Leadership with Daniel Goleman and Annie McKee A previous article Neuroscience and Leadership The Promise of Insights was published in the January-February 2011 Ivey Business Journal
references
bull Baumeister R F Bratslavsky E Finkenauer C amp Vohs K D (2001) Bad is stronger than good Review of General Psychology 5 323-370
bull Boyatzis R E Jack A Cesaro R Passarelli A amp Khawaja M (2010) Coaching with Compassion An fMRI Study of Coaching to the Positive or Negative Emotional Attractor Presented at the Annual Meeting of the Academy of Management Montreal
bull Boyatzis R amp McKee A (2005) Resonant Leadership Renewing Yourself and Connecting With Others Through Mindfulness Hope and Compassion Boston Harvard Business School Press
bull Boyatzis RE Passarelli AP Koenig K Lowe M Mathew B Stoller J amp Phillips M (under review) Examination of the Neural Substrates Activated in Experiences with Resonant amp Dissonant Leaders Leadership Quarterly
bull Boyatzis RE Smith M and Blaize N (2006) ldquoDeveloping sustainable leaders through coaching and compassion Academy of Management Journal on Learning and Education 5(1) 8-24
bull Cattaneo L amp Rizzolatti G (2009) The mirror neuron system Neurobiological Review 66(5) p 557-560
bull Decety J amp Michalska KJ (2010) Neurodevelopmental change in circuits underlying empathy and sympathy from childhood to adulthood Developmental Science 13 6 886-899
bull Dickerson SS amp Kemeny ME (2004) Acute stressors and cortisol responses A theoretical integration and synthesis of laboratory research Psychological Bulletin130(3) 355-391
bull Fredrickson B L amp Losada M (2005) Positive affect and the complex dynamics of human flourishing American Psychologist 60(7) 678-686 Psychology 86(2) 320-333
bull Garcia-Segura LM (2009) Hormones and brain plasticity NY Oxford University Press
l e a d e r s h i p
bull Goleman D Boyatzis R amp McKee A (2002) Primal Leadership Realizing the Power of Emotional Intelligence Boston Harvard Business School Press
bull Goleman D amp Boyatzis R (September 2008) Social intelligence and the biology of leadership Harvard Business Review 869 pp 74-81
bull Hatfield E Cacioppo JT amp Rapson RL (1993) Emotional contagion NY Cambridge University Press
bull Iacoboni M (2009) Imitaiton empathy and mirror neurons Annual Review of Psychology 60 p 653-670
bull Jack A Dawson A Ciccia A Cesaro R Barry K Snyder A amp Begany K (2010) Social and Mechanical reasoning define two opposing domains of human higher cognition Under review Manuscript from Case Western Reserve University Cleveland Ohio
bull Janig W amp Habler H-J (1999) Organization of the autonomic nervous system Structure and function In O Appendzeller (ed) Handbook of Clinical Neurology The Autonomic Nervous System Part I Normal Function 74 1-52
bull LeDoux J (2002) Synaptic self How our brains become who we are NY Viking
bull McEwen B S (1998) Protective and damaging effects of stress mediators New England Journal of Medicine 338 171-179
bull Sapolsky R M (2004) Why zebrarsquos donrsquot get ulcers (third edition)NY Harper Collins
bull Schulkin J (1999) Neuroendocrine regulation of behavior NY Cambridge University Press
bull Senior C Lee NL amp Butler M (2010) Organizational cognitive neuroscience Organization Science On-line in advance of print 1-10
3 33 3
Managing People amp Organizations
3 4
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Motivational dynamics have changed dramatically to reflect new work requirements and changed worker expectations One of the biggest changes has been the rise in importance of psychic or intrinsic rewards and the decline of material or extrinsic rewards This author draws upon recent research to explain the popularity of intrinsic rewards and how these rewards can be used to build a high-engagement culture
by Kenneth thomas
I have been researching workplace motivation for about 30 years and Irsquom amazed at how much has changed recently Automation and off-shoring have eliminated most of the highly repetitive jobs in the US while global competition has produced flatter more responsive organizations that require employees to use judgment and initiative to a much greater extent Over this same 30-year period the proportion of American workers who say that their work is meaningful allows them discretion and makes use of their abilities has more than doubledmdashfrom less than one third to about two thirds1 In addition younger workers now come to organizations with different expectations than their parents Raised during an era of rapid technological change and instant access to data they respond best to work that is more meaningful allows them to learn cutting-edge skills and lets them find their own ways of accomplishing tasks
Most of the motivational models used today were developed in earlier eras when work and workers were different That is why my colleagues and I developed models and strategies of motivation that better reflect the changes in todayrsquos work dynamics2 In doing so we discovered that intrinsic rewards have become more important and more prevalent in the workplace today This article will describe the reasons for this increase and why intrinsic rewards are so important today
The Four Intrinsic Rewards that Drive Employee Engagement
extrinsiC and intrinsiC reWards
Extrinsic rewardsmdashusually financialmdashare the tangible rewards given employees by managers such as pay raises bonuses and benefits They are called ldquoextrinsicrdquo because they are external to the work itself and other people control their size and whether or not they are granted In contrast intrinsic rewards are psychological rewards that employees get from doing meaningful work and performing it well
Extrinsic rewards played a dominant role in earlier eras when work was generally more routine and bureaucratic and when complying with rules and procedures was paramount This work offered workers few intrinsic rewards so that extrinsic rewards were often the only motivational tools available to organizations
Extrinsic rewards remain significant for workers of course Pay is an important consideration for most workers in accepting a job and unfair pay can be a strong de-motivator However after people have taken a job and issues of unfairness have been settled we find that extrinsic rewards are now less important as day-to-day motivation is more strongly driven by intrinsic rewards
the intrinsiC reWards in todayrsquos WorK
To identify these intrinsic rewards we began by analyzing the nature of todayrsquos work Basically most of todayrsquos workers are asked to self-manage to a significant degreemdashto use their intelligence and experience to direct their work activities to accomplish important organizational purposes This is how todayrsquos employees add valuemdashinnovating problem solving and improvising to meet the conditions they encounter to meet customersrsquo needs
In turn we found that the self-management process involves four key steps3
bull Committing to a meaningful purpose bull Choosing the best way of fulfilling that purpose bull Making sure that one is performing work activities competently and
bull Making sure that one is making progress to achieving the purpose
3 5
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Each of these steps requires workers to make a judgmentmdashabout the meaningfulness of their purpose the degree of choice they have for doing things the right way the competence of their performance and the actual progress being made toward fulfilling the purpose These four judgments are the key factors in workersrsquo assessments of the value and effectiveness of their effortsmdashand the contribution they are making
When positive each of these judgments is accompanied by a positive emotional charge These positive charges are the intrinsic rewards that employees get from work ranging in size from quiet satisfaction to an exuberant ldquoYesrdquo They are the reinforcements that keep employees actively self-managing and engaged in their work
The following are descriptions of the four intrinsic rewards and how workers view them4
bull Sense of meaningfulness This reward involves the meaningfulness or importance of the purpose you are trying to fulfill You feel that you have an opportunity to accomplish something of real valuemdashsomething that matters in the larger scheme of things You feel that you are on a path that is worth your time and energy giving you a strong sense of purpose or direction
bull Sense of choice You feel free to choose how to accomplish your workmdashto use your best judgment to select those work activities that make the most sense to you and to perform them in ways that seem appropriate You feel ownership of your work believe in the approach you are taking and feel responsible for making it work
bull Sense of competence You feel that you are handling your work activities wellmdashthat your performance of these activities meets or exceeds your personal standards and that you are doing good high-quality work You feel a sense of satisfaction pride or even artistry in how well you handle these activities
bull Sense of progress You are encouraged that your efforts are really accomplishing something You feel that your work is on track and moving in the right direction You see convincing signs that things are working out giving you confidence in the choices you have made and confidence in the future
levels of intrinsiC reWards
Professor Walter Tymon (Villanova University) and I developed and refined a measure of the four intrinsic rewards now available as the Work Engagement Profile5
Together with our colleagues we have used it for research training and interventions in a number of organizations in the US Canada and India
We found it useful to break down each reward into three levelsmdashhigh (the top 25 of our norm sample) middle-range (middle 50) and low (bottom 25)
High-range scorers experience the four intrinsic rewards most intensely These rewards are highly energizing and engaging
Middle-range scorers experience these same rewards to a more moderate degreemdashas somewhat positive but limited For example their work may seem reasonably meaningful when they stop to think of it they may have a fair amount of choice but have to live with some decisions that donrsquot make sense to them they may feel they do most things pretty well but not a few others and they may feel they are making some progress but less than they would like They experience these reward levels as moderately energizing and engagingmdashenough to put in a ldquofair dayrsquos workrdquo but end up feeling less satisfied than they would like
Low-range scorers are dissatisfied with many aspects of their work They may feel their work is relatively meaningless or pointless that they are unable to make or influence decisions about how to do their work are unable to perform work activities very well and are making little or no headway Experiencing these feelings drains the workers of energy and they are likely to become cynical and resentful about their job over time
iMportant benefits of the intrinsiC reWards
Our research findings to date reveal the widespread benefits of the above intrinsic rewards for both organizations and employees6
From the organizationrsquos viewpoint our data confirm the impact of the intrinsic rewards on employee self-management For example people with high reward levels show greater concentration and are rated as more effective by their bosses But the benefits extend beyond self-management The intrinsic rewards are strong predictors of retention Note that this is the ldquorightrdquo kind of retentionmdashkeeping the people who are energized and self-managing rather than those who canrsquot afford to leave We find that employees with high levels of intrinsic rewards also become informal recruiters and marketers for their organization They recommend the organization to friends as a place to work and recommend its products and services to potential customers
3 6
The intrinsic rewards are also a relatively healthy and sustainable source of motivation for employees There is little chance of burnout with this form of motivation Workers with high reward levels experience more positive feelings and fewer negative ones on the job Their job satisfaction is higher they report fewer stress symptoms and are more likely to feel that they are developing professionally7
Overall the intrinsic rewards seem to create a strong winwin form of motivation for both an organization and its employeesmdashand one which suits the times This type of motivation is focused on the shared desire that employeesrsquo work makes an effective contribution to meaningful purposes so that it is performance-driven It embodies the kind of self-management and professional development demanded by younger workers It does not depend on large outlays of money to generate extra effort so that it is feasible when funds are tight Furthermore intrinsic rewards do not require that a boss be present as exemplified by the growth of the virtual work and telecommute environments
Despite these benefits however a number of managers underestimate the importance of intrinsic rewards and continue to treat financial rewards as the key factor in motivating others While some of this bias may simply come from their use and familiarity with older models there is another explanation Research shows that although people are quick to recognize the role of intrinsic rewards in their own behavior there is a general tendency to assume that other people are motivated mostly by money and self-interest8 In our workshops for example managers are commonly surprised to learn that intrinsic rewards are valued as much by their employees as by themselves So it is important to educate the managers in your organization on this issue
building a high-engageMent Culture
In our work with managers change agents and training specialists we have developed seven guidelines for building a culture that supports high levels of engagement and intrinsic rewards9
1 begin with a meaningful purpose
Unlike financial rewards you simply canrsquot task the Human Resources Department with developing an ldquointrinsic reward systemrdquo Building intrinsic motivation is largely a line management responsibility although HR can offer considerable help That responsibility begins with spelling out a meaningful purpose for the organization To be meaningful this purpose usually needs to involve more than profit tapping directly into the contribution that the organizationrsquos work makes to
its customersmdashthe contribution that allows it to earn a profit Again it is largely that sense of contribution to something of value that drives the entire self-management process
2 build intrinsic motivation and engagement into management training and executive coaching
As mentioned earlier managers tend to recognize the role of intrinsic rewards in their own motivation but often underestimate their importance for other people To build a culture of engagement it is important to incorporate training on intrinsic motivation and employee engagement into management development programs We also find that managers are more credible and effective in promoting the value of engagement when they first learn how to better understand and manage their own intrinsic rewards Training typically begins by getting managers in touch with their own intrinsic rewards and then shifts to learning how to support the intrinsic rewards of their direct reports At executive levels the four intrinsic rewards also provide a useful framework for executive coaching For example the New West Institute builds its coaching on executive transitions around the four rewards identifying what would be most meaningful for the executives in their new position what choices they have the new competencies they need to build and the ways they will identify progress10 Training and coaching then are an important part of embedding intrinsic motivation and engagement into the organizationrsquos culture
3 focus conversations on meaningfulness choice competence and progress
Leaders from the top down need to convey the same messagemdashthat the organization stands for doing work that matters and doing it well When approaching any work project leaders can underline the importance of contribution by focusing discussions on the basic questions in the self-management process bull What can we do here that is meaningful bull What creative choices can we think of to accomplish this
bull How can we make sure wersquore doing this work competently
bull How can we make sure wersquore actually accomplishing the purpose
These questions bring employee contributions to the foreground and highlight the intrinsic rewards
4 engage the ldquomiddlerdquo
Pay special attention to building intrinsic motivation for people in the middle rangesmdashthe large group that is only somewhat engaged If you are able to move their intrinsic rewards to the high range they will combine with the people who already highly engaged to form a
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 7
large majority of highly engaged energized peoplemdashthe critical mass needed to support a culture of high engagement
5 Measure intrinsic reward levels
Without some way of assessing the state of intrinsic rewards in your organization you will be flying blind We use the Work Engagement Profile for systematic measurement though with experience it is possible to get a rough sense of reward levels from everyday conversations with employees11 Measuring the reward levels will show you the overall level of engagement in your organization and allow you to recognize improvement It will also allow you to determine if any rewards are at lower levels than others Because self-management requires all four reward levels the lowest rewards will tend to act as a drag on overall engagement over timemdashso that they deserve special attention
6 provide missing building blocks for intrinsic rewards that you need to bolster
Each reward has its own unique building blocks Building a sense of competence involves actions that are different than those used in building a sense of choice for example The following is a list of key building blocks12
Sense of Meaningfulness bull A non-cynical climatemdashfreedom to care deeply bull Clearly identified passionsmdashinsight into what we care about
bull An exciting visionmdasha vivid picture of what can be accomplished
bull Relevant task purposesmdashconnection between our work and the vision
bull Whole tasksmdashresponsibility for an identifiable product or service
Sense of Choice bull Delegated authoritymdashthe right to make decisions bull Trustmdashconfidence in an individualrsquos self-management bull Securitymdashno fear of punishment for honest mistakes bull A clear purposemdashunderstanding what we are trying to accomplish
bull Informationmdashaccess to relevant facts and sources
Sense of Competence bull Knowledgemdashan adequate store of insights from education and experience
bull Positive feedbackmdashinformation on what is working bull Skill recognitionmdashdue credit for our successes bull Challengemdashdemanding tasks that fit our abilities bull High non-comparative standardsmdashdemanding standards that donrsquot force rankings
Sense of Progress bull A collaborative climatemdashco-workers helping each other succeed
bull Milestonesmdashreference points to mark stages of accomplishment
bull Celebrationsmdashoccasions to share enjoyment of milestones
bull Access to customersmdashinteractions with those who use what wersquove produced
bull Measurement of improvementmdasha way to see if performance gets better
Notice that some of these building blocks involve relatively observable or ldquohardrdquo elements such as job designs information systems and formal authority Others involve ldquosofterrdquo aspects of organizational culture and managerial style such as a non-cynical climate celebrations trust and skill recognition
7 adopt a change and implementation process that is itself engaging
You could try to build intrinsic rewards using a centralized top-down decision process But we find that it makes more sense to use the change process itself as a means of fostering high levels of engagement That was the genius of the Work Out process used by Jack Welch to help change the culture at GE13 Similar processes are now used for planning and change in a number of organizations14 In these applications participatory processes allow teams of employees to identify meaningful work-related problems recommend solutions that make sense apply their diverse competencies and experience a rapid sense of progress When these processes address the building of intrinsic rewards and engagement they not only yield workable solutions but also produce their own sense of excitementmdash which often serves as a significant turning point in the organizationrsquos culture15
The Author
Kenneth thomas
Kenneth W Thomas is an emeritus professor researcher and developer of training materials He is co-author of the best-selling Thomas-Kilmann Conflict Mode Instrument (TKI) and the author of Intrinsic Motivation at Work What Really Drives Employee Engagement (Berrett-Koehler 2009) This article is based on the book wwwkennethwthomasnet
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 8
references
bull These data are from James OrsquoToole and Edward Lawler III The New American Workplace Palgrave Macmillan 2006
bull This article is based on research findings and experience collected with the following colleagues Walter Tymon Jr Villanova University Erik Jansen Naval Postgraduate School Bruce Vincent and Steve deBree New West Institute and Betty Velthouse University of Michigan Flint
bull The self-management process is described in more detail in Kenneth Thomas Intrinsic Motivation at Work Berrett-Koehler 2009
bull These descriptions are adapted from Kenneth Thomas and Walter Tymon Jr Work Engagement Profile CPP Inc 2009
bull The Work Engagement Profile with interpretive materials is available in print form through CPP Inc at wwwcppcomWEP An online version will be available in 2010 Information on the reliability and validity of the Profile is provided in the Work Engagement Profile Technical Brief available online at wwwcppcomWEPtechbrief
bull These findings are summarized in the Work Engagement Profile Technical Brief
bull These finding are also summarized in the Work Engagement Profile Technical Brief I am particularly indebted to Professor Jacques Forest of the Universite du Quebec a Montreal for permission to summarize his work See also the findings on professional development in the article by Walter Tymon Jr Stephen Stumpf and Jonathan Doh ldquoExploring talent management in India The neglected role of intrinsic rewardsrdquo Journal of World Business 2010 in press
bull This finding was reported by Chip Heath ldquoOn the social psychology of agency relationships Lay theories of motivation overemphasize extrinsic incentivesrdquo Organizational Behavior and Human Decision Processes 1999 pp 25-62
bull I am particularly indebted to Bruce Vincent and Steve deBree of the New West Institute an early adopter of the Work Engagement Profile and my book Intrinsic Motivation at Work (Berrett-Koehler 2000 and 2009) They have contributed a number of lessons learned from their applications to organizational change and executive transition coaching
bull Information on New Westrsquos approach to executive transition coaching is available at wwwnewwestinstitutecom
bull For more specific advice on recognizing and increasing intrinsic reward levels see Intrinsic Motivation at Work 2009
bull This list is adapted from the Work Engagement Profile A more detailed discussion of the building blocks and related management actions is contained in Intrinsic Motivation at Work
bull The Work-Out process has been described in a number of books including Jack Straight From the Gut by Jack Welch with John Byrne Warner Business Books 2001
bull See for example the participative planning process described by Marvin Weisbord and Sandra Janoff in Future Search Second Edition Berrett-Koehler 2000
bull This observation is based on the change work of the New West Institute which is built around the concepts in this article Information on the New West Institutersquos participative approach to change is available at wwwnewwestinstitutecom
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
3 9
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
Many a good idea has been sabotaged by a co-worker who during a presentation cuts right in to say ldquoThatrsquos a good idea buthelliprdquo Readers of this article will learn what tactics they can use to effectively disarm and discourage such a saboteur and allow their ideas to be heard fully and ultimately win acceptance
by lorne Whitehead
ldquoand another good idea is lostrdquo
ldquoThank you That concludes my presentation Are there any questionsrdquo
Samantha has just presented her proposal to the Capital Investment Committee She has done everything right so far Her team was tasked with finding an ldquoout-of-the-boxrdquo solution to a critical problem They consulted widely within the company with customers and outside experts When a great solution emerged they checked in with the various interest groups They adapted to feedback and kept key influencers informed Their clear concise proposal outlines the main factors the need for this proposed innovation the method followed to develop the proposal the alternatives that were considered and the advantages and risks of their recommendation They were also careful to get the ldquolook and feelrdquo right ndash their process was professional and appropriate It was all textbook classic
At first a few committee members ask Samantha some pretty innocuous questions But then all of a sudden Dan Jones clears his throat and the room falls silent Herersquos the thing about Dan Jones ndash he knows how to act like a team player but in truth he isnrsquot one In this case Dan sees Samantharsquos rapid career advancement as a personal threat
He speaks ldquoSamantha I appreciate your grouprsquos hard work but in all honesty I have to question whether this
Why Good Ideas Diehellip and a Simple Approach
to Saving Them
was appropriate because [blah-blahhellipworry-worryhellip] so I move that before we consider your ldquoschemerdquo it should first be referred to the Legal Issues Committee where these concerns can be properly addressedrdquo
Samantha opens her mouth but she just canrsquot find the right words Danrsquos attack (and thatrsquos really what it is) feels unfair and unjustified but right now at this critical moment she does not have a simple effective rebuttal She feels that whatever she says will make matters worse But she has to say something and even as she speaks she knows her comments arenrsquot responding well to Danrsquos ldquogotchardquo So the pile-on begins First one person picks up a detail in her response and asks a question that she cannot entirely understand or answer Then Dan comes in with another zinger She looks around the room for support Silence
The committee votes to send Samantharsquos proposal to what might as well be called the Committee for Infinite Delay As a result the company misses an important opportunity In a few months Samantha will leave Shersquoll be OK ndash but will the company she left behind also be OK
Does this scenario seem familiar We have all witnessed far too often excellent ideas that die even though they have been very well communicated They die for reasons that are not completely rational This can be infuriating and more importantly result in huge opportunity costs for the company
It shouldnrsquot have to be this way Moreover for business leaders today such lost opportunities are simply not acceptable The stakes are higher and the challenges greater now because our world is changing at a much more rapid pace than ever Businesses have always had to adapt in order to survive and this has always been a challenge because adaptation requires good ideas consumes resources and entails risk But today the rate of change is easily twice what it was 20 years ago Yet the resources and expertise available for adapting to change have increased very little if at all
4 0
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
John Kotter professor emeritus of Harvard Business School has focused significant research on the challenge of large-scale change From this research he has developed what he calls an 8-Step Process for Leading Change Critical to the success of this model is the concept of engaging the organization ndash creating buy-in for the change We wrote our book Buy-In Saving Your Good Idea from Being Shot Down to help address some of the challenges in getting that critical engagement and support The only way to overcome these challenges is to develop an understanding of the problem and some possible solutions In the book and in this article we will show you a counterintuitive yet highly effective method to ensure that important good ideas can prevail But first we need to understand the problem of why people shoot down good ideas
idea-Killing attaCKs
Why would anyone want to kill a good idea Most of our co-workers are decent people who want good things to happen But people are also complex and many of us from time to time may be susceptible to common human failings that can lead to the premature demise of a good idea These failings may include jealousy fear complacency confusion conflict of interest short sightedness vanity and gullibility However the causes do not really matter ndash you can only respond to the behavior namely the launching of challenging attacks to your ideas The best antidote (a respectful clear short simple rebuttal) serves you well regardless of the attackerrsquos motivation
Wersquove observed that these attacks all share several characteristics They can be used to strike almost any good idea (which makes them useful for habitual attackers) they can be easily customized to suit the idea at hand (which makes them appear thoughtful and worth considering) they can seem well-intended (which builds sympathy for the attacker) and they are very difficult to refute if you are not prepared for them (which is why they usually work so well)
Through our research we have identified 24 distinctly different attacks that are commonly used It seems a bit daunting because this is too many for most of us to memorize But we have devised some simple straightforward and easy-to-remember ways to understand and combat attacks
four taCtiCs people use to attaCK good ideas
There are four underlying tactics for shooting down a leaderrsquos suggested plan or proposal Sometimes these tactics are used in combination These are
bull Delay Your opponent makes a reasonable-sounding case that we should wait (just a bit) until some other project is done or that we should send this back into committee (just to straighten up a few points) or (just) put off the activity until the next budget cycle He may then divert attention to another legitimate pressing issue Therersquos the sudden budget shortfall the unexpected announcement from a competitor the growing problem here the escalating conflict there This attack works well most of the time often causing an irreversible slow-down in getting the grouprsquos buy-in
bull Confusion Your opponent raises questions or concerns that so muddle the conversation with irrelevant facts convoluted logic or so many alternatives that it is impossible to have clear intelligent dialogue upon which to build support for your idea (ldquoIf you will look at page 46 in the document I just passed out it suggests that market share in China will fall within three years and if you go to page 58helliprdquo) The conversation slides into endless side discussions Eventually people conclude that the idea has not been well thought-out Or they feel stupid because they cannot follow the conversation which causes anger that easily flows back toward you and your proposal
bull Fear mongering Someone seizes on an undeniable fact (ldquoYour idea sounds a lot like the project we launched three years agordquo) and then spins a tale around it outlining consequences that can be truly frightening or more often than not simply push peoplersquos hot buttons (ldquoThat failed and several people on our team were laid offrdquo) The logic that connects a past fact to an imagined outcome will often be faulty even silly but it can still be very effective Once aroused the crowdrsquos anxieties wonrsquot necessarily disappear when you offer an analytically sound rebuttal
bull Ridicule Your opponent doesnrsquot shoot bullets directly at the idea she targets the person or people behind the concept instead Usually this works best when the attack is sugar coated You may be made to look silly incompetent hypocritical or worse This tactic is used less than the others probably because it can backfire so easily on the attacker But when it works there can be collateral damage Not only is the idea wounded your reputation may be tarnished and your credibility takes a hitmdashhurting not only this idea but possibly future ones as well
4 1
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
hoW Can you overCoMe suCh attaCKs
To combat the use of these tactics we have developed methods for saving your good idea from getting shot down They are a bit counterintuitive As with many thing that are more an art than a science they require both the right attitude and the right actions The keys to responding to an attack are
bull Donrsquot push away opposing viewpoints let the lions into the arena As you try to build support for your idea you may be inclined to clear the field of people who you think may oppose your good idea Maybe you leave them off an e-mail distribution list or schedule meetings or teleconferences when you know the most disruptive types will be away That may seem smart some people have even had success with such approaches But it is more powerful to use opposing viewpoints as a platform for gaining the attention and engagement your idea is going to need With more attention you have a better chance to make your case You may even draw some sympathy or admiration because yoursquore willing to stand in front of a firing squad
bull Donrsquot respond with endless data and logic simple common sense can be more powerful Itrsquos only natural when your fabulous idea is attacked to go over it again explaining all its virtues in detail while emphasizing all those places where your opponent has gotten it wrong wrong wrong For a very short while it may make you feel better but it wonrsquot work Itrsquos better to keep your responsesmdashall of themmdashshort and focused allowing no time for thoughts to wander from the topic at hand No jargon no complex arguments just a generous dose of common sense This can be particularly effective in warding off confusion attacks by removing the swirl of alternatives that may cloud peoplersquos minds
bull Always be respectful donrsquot let it get personal donrsquot fight back Itrsquos critical to bite your tongue no matter how tempted you may be to lash out against what you perceive to be an unfair reaction to or representation of your idea Gaining buy-in is as much about making an emotional connection as an intellectual one and encouraging mutual respect in a heated discussion about a proposal can go a long way toward winning hearts Of course wersquore hardwired to want to fight run away or defend ourselves when attacked But talking sensibly and respectfully works better The more mindful we are of how easily dysfunctional behavior can pop up the easier it is for us to keep others in check
bull Focus on the crowd not the attacker It is natural when hit with confusion fear mongering character assassination or delay strategies to focus onersquos attention on the attacker Thatrsquos a big mistake At the risk of stating the obvious again remember You are seeking buy-in from a solid majority which need not include those few who really want to sink the proposal So donrsquot allow yourself to get sucked into a debate with a few disrupters thereby losing touch with the quiet majority you need to reach If you donrsquot pay sufficient attention to them you may not realize in time that they are becoming confused afraid or being drawn into a delay Watch the crowd very carefully for signs that you are losing their attention Scan the nodding heads for smiles or frowns for growing energy or the lack thereof
bull Carry out careful case-specific preparation Generally you will find it very helpful to review the 24 specific generic attacks we identify in Buy-In before you face the inquisition The Appendix below lists some of the most common ones and includes generic effective responses for each They are presented in a deliberately simplistic manner for you to enhance If the stakes are high enough you may benefit from holding a small group-brainstorming session in which you review the possible forms of attack For each itrsquos very helpful to consider specific ways that an attacker may approach your particular situation This is easier than it sounds because in any given case many of the attacks wonrsquot apply while others may be quite obvious and wonrsquot need much thought But for the attacks you find both relevant and tricky ndash could be 5 could be 14 ndash brainstorming will be invaluable You will uncover potential attacks that you otherwise would have missed and you will discover the benefit of having a respectful effective response at your fingertips when you really need it This homework neednrsquot take long and it is more than worth the effort because very few of us can respond well in real time to completely unexpected attacks
Samantha was blind-sided by Danrsquos diversionary delay tactic Like many of us she did not respond well to this unexpected attack Had she prepared herself she would have been able to respond smoothly by acknowledging Danrsquos concern while assuring the group that her team will successfully address it just like the many others that were solved while developing the proposal Samantha should have confidently communicated that the task was well in hand and that the proposal should continue on its course welcoming feedback in the process The method proposed here for fending off unfair idea-killing
4 2
attacks offers a straightforward way to prepare for the dreaded inevitable unknown It also can give you the confidence Samantha lacked As a result you will be able to reflect and react faster and more effectively during tough discussions The net result will be that good ideas will more often be adopted which will help both their proponents and their intended beneficiaries throughout our society
appendix soMe faMiliar and generiC attaCK forMs
Below is a sampling of the 24 generic attacks mentioned in this article A generic response is suggested to help brainstorm each one For the full listing of attacks and their responses visit kotterinternationalcomKotterPrinciplesBuyInAttacksAndResponsesaspx
1 Wersquove never done this in the past and things have always worked out OKTrue But surely we have all seen that those who fail to adapt eventually become extinct
3 You are exaggerating This is a small issue for us if it is an issue at allTo the good people who suffer because of this problem it certainly doesnrsquot look small
14 Irsquom sorry ndash you mean well but look at this problem yoursquove clearly missed You canrsquot deny the significance of this issueNo one can deny the significance of the issue you have raised and yes we havenrsquot explored it But every potential problem we have found so far has been readily solved So in light of what has happened again and again and again I am today confident that this new issue can also be handled just like all the rest
16 We tried that before and it didnrsquot workThat was then Conditions inevitably change (and what we propose probably isnrsquot exactly what was tried before)
18 Good idea but itrsquos the wrong time We need to wait until this other thing is finished (or this other thing is started or the situation changes in a certain special way)The best time is almost always when you have people excited and committed to make something happen And thatrsquos now
23 It will be impossible to get unanimous agreement with this planYou are absolutely right Thatrsquos almost never possible and thatrsquos OK
The Author
lorne WhiteheadLorne A Whitehead is Leader of Education Innovation and a professor of physics at the University of British Columbia He is a co-author (with John Kotter Harvard Business School emeritus professor) of Buy-In Saving Your Good Idea from Being Shot Down (blogshbrorgkotter) This article is based on the book
For more information on the 8-Step Process fo Leading Change visit kotterinternationalcomkotterprincipleschangesteps
M a n a g i n g P e o p l e a n d O r g a n i z a t i o n s
4 34 3
innovation
4 4
i n n o v a t i o n
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research Readers will learn how to manage the critically important first steps from this thinker author and CEO
by idris Mootee
The need for 21st-century mindsets and protocols has heightened interest in innovation The manifestation of that need is a process we call the fuzzy front end an insight-driven prototype-powered and foresight-inspired search for new ideas that can be applied to products services experiences business strategies and business models It is both a creative and an analytical process to better identify customer needs collect insights explore white space and create possibilities
It is often an ongoing challenge for companies to synthesize a sea of insights and identify breakthrough innovations for which demand has yet to surface fully AND prevent being blindsided by aggressive competitors The challenge lies on several fronts the gathering and filtering of ideas the creative manifestation and experimentation of ideas the internal selling of ideas and capturing economic value from them To meet this challenge managers normally resort to hosting an offsite brainstorming session However this exercise usually lacks rigor and creates a large pool of diverse ideas with little relevancy to the business strategy The drive for off shoring and optimization has further discouraged companies from experimenting with new ideas Industry leaders particularly are at risk of failure due mainly to their inability to see the next big thing and their false sense of relative competitive advantage This is why the fuzzy front end is so critical and needs to be engineered into a companyrsquos strategic planning process In this
Strategic Innovation and the Fuzzy Front End
article I describe a systematic approach for managing that fuzzy front end one that has the right tools and frameworks and that is a very effective mechanism for getting a sharper picture of the future and identifying opportunities outside the current roadmap
Managing the strategiC fuzzy front end
Innovation is only strategic when all activities related to it are aligned with reenergizing the core or connecting adjacent or future business opportunities with the core Otherwise pursuing uninformed innovation paths is likely to lead to failure Successfully managing the fuzzy front end requires the following
bull Combining specific skill sets tools and methodologies from different disciplines in order to uncover the most salient bits of information and insights that will ultimately inspire and help shape the development of value-creating innovations
bull Balancing divergent exploration and investigation with convergent analysis
bull Developing and articulating a more holistic awareness of current and emerging consumer needs mind-sets values and expectations
bull Collecting organizing and making sense of the forces that will help shape the acceptance and practicality of new products services and business models etc
bull Synthesizing and clarifying competitive opportunities in order to help establish the most effective starting points for innovation
bull Helping organizations better understand choices and explore opportunities early on prior to investing a great deal of time and resources
bull Clearly articulating potential solutions for customer-centered feedback and learning
The methodology used to drive these activities ndash that once consisted of random insight collection and creative brainstorming ndash has become more sophisticated For example numerous disciplines now collaborate to leverage the potential of their unique skills and tool sets
4 5
i n n o v a t i o n
By establishing more formal and structured front-end processes organizations have been able to increase the value speed and quantity of high-potential concepts as well as the probability of their success
More sophisticated methodology however has not completely eliminated the most common symptoms of front-end failure These include
bull Not asking the right questions that help frameguide the design and scope of initial research and investigations
bull An inability to organize and make sense of massive qualitative and quantitative insights and apply them to opportunities mapping
bull Creating bridges between innovative ideas and current business models leading to the abrupt cancellation of projects in midstream because they donrsquot ldquomatch the companyrsquos business strategyrdquo
bull Not giving ldquotop-priorityrdquo innovation projects the required attention because there is no senior executive sponsor or because key people are ldquotoo busyrdquo to spend the necessary time working on them
bull Failing to articulate how innovative ideas can create economic value and how this value can be captured as well as failing to determine the opportunity cost of these innovations
Complicating and magnifying the difficulty of managing these challenges is the fact that this first stage of the strategic innovation process is commonly referred to as the ldquofuzzyrdquo front end The adjective ldquofuzzyrdquo is appropriate because at no other stage is the future context of an innovation as uncertain ambiguous and complex As well this is the stage where organizations typically suffer from a deficit of actionable ldquofuture-orientedrdquo information and lack the meaningful customer insights required to help them setre-calibrate goals make design decisions and pursue innovations with confidence ldquoFuzzyrdquo also points to the scale and variety of unpredictable non-linear drivers and inputs (behavioral socio-cultural political environmental economic technological etc) that may or may not combine to shape the future desirability acceptability and feasibility of a given innovation
Against a backdrop of such uncertainty and ambiguity it is easy to understand why the front endrsquos role in innovation is first and foremost about learning in order to clarify and recognize an opportunity This is because the focus in this first stage is on the methodical acquisition synthesis sharing creation and expression
of contextual relevant knowledge and insights that will ultimately help feed downstream foresight opportunity mapping ideation prototyping and validation exercises
the seven Clarifying phases of the fuzzy front end
The fuzzy front end of our strategic innovation process consists of seven phases bull Collecting customer insights (UCI) bull Developing strategic foresights (DSF) bull Sense making and opportunity mapping (SOM) bull Ideation and concept development (ICD) bull Rapid concept prototyping (RCP) bull Customer co-creation (CCC) bull Brand market assessment (BMA)
Our extensive experience in studying and applying the principles of front-end innovation activities in over 100 companies has enabled us to identify and create certain best and next practices in each of these phases From our descriptions below the reader will take away a good understanding of the most effective frameworks tools and techniques for managing the critically important strategic fuzzy front end
phase 1 unCover CustoMer insights (uCi)
Managing the fuzzy front end begins with ethnographic research into unknown and unmet human needs We do this for one reason Innovative ideas transform behaviors cultures and consumers To truly understand these things ndash to know and feel them so they inspire organizations to move forward ndash the tool we employ to identify and communicate true insights is anthropology
The study of human culture and society anthropologyrsquos territories of inquiry and expertise are vast myths symbols signs tools technologies performances rituals communities communications languages and the multitude of ways we manipulate create and innovate our selves and our identification with them
To cover that territory and bring back a true understanding of and appreciation for customer needs our anthropologists draw on ethnographic research Ethnography is the art and science of telling stories about peoplersquos stories Itrsquos how anthropologists study and tell stories about people in the spaces and places where they live work play shop eat and imagine the world around them
Drawing on the inter-disciplinary research methods and social theories that frame every project our teams seek to identify micro (tactical) and macro (thematic cultural) insights that provide a critical lens and insider
4 6
perspective on the beliefs behaviors and attitudes that drive consumers and shape their cultures and communities
For many the anthropological approach to ethnography is a radical shift away from traditional market research Ethnography reveals customer narratives whereas surveys produce only data Ethnography relates dreams hopes histories memories fantasies experiences and performances in everyday life Focus groups on the other hand only offer opinions Ethnography depicts real people in real situations not in personas And where market research creates speculation ethnography informs and drives innovation
The UCI phase typically includes four core activities
bull Design field research With our clients and through stakeholder interviews andor observations we begin by identifying the critical questions challenges and areas of inquiry that will frame our study Here we decide on methodology timing recruiting location market segment and other tactics to be used in our research
bull Conduct ethnographic research Watching participating asking and being in the same psychic and physical spaces and places as consumers enables us to understand and articulate their stories Those stories can be pursued in tandem with other research methods at any stage in a project lifecycle and depending on the scope of inquiry quickly as required or over an extended period of time The earlier that we are involved in that lifecycle the better the outcome
bull Frame the insights Working with strategists designers experience architects and other specialists our formally trained PhD-level anthropologists draw on social theories and field data to map patterns and identify strategic opportunities by suggesting new metaphors contexts and behaviors
bull Organize the data and present the deliverables andor workshops that will best socialize our findings and recommendations in our clientrsquos organization We pride ourselves on creating clear concise and critical reports documentary video photographs and consumer profiles that will tell a deep story in an accessible way and that will begin to yield value immediately
phase 2 develop strategiC foresights (sf)
The primary goal of Strategic Foresight is to help individuals and organizations identify understand envision and gain access to future ldquoWhat ifrdquo contexts
This is done to avoid surprises better understand their choices and the potential long-term impacts of actionsinactions At the front-end strategic foresight is about ldquofuture proofingrdquo
Strategic Foresight generally seeks to define futures that incorporate changes in consumer behavior motivations values and expectations It also questions and explores the disruptive potential of technology and its impact on the design of new products services experiences and business models
Activities in this phase also aim to improve ldquosituational awarenessrdquo and generate constructive inputs that enhance downstream sense making and opportunity-mapping exercises This is achieved by developing a variety of future-oriented scenarios that help team members and organizations situate themselves ldquoin the futurerdquo set and define new goals andor strategic objectives and discuss their potential outcomes
The primary tools and activities used in this phase typically include bull Environmental Scanning bull Context Mapping bull Scenarios Development bull Scenarios Workshop
phase 3 strategiC sense-MaKing and opportunity Mapping (soM)
Strategic sense-making and opportunity mapping is a convergent exercise that focuses on distilling and synthesizing all previously gathered knowledge insights and foresight so that key patterns themes and opportunity spaces can be defined discussed expanded upon and explored
At this stage the opportunities are described only in broad terms Sheer idea productivity is more important than the articulation of low-level details given to ideas that have the potential to capitalize on ldquowhite spacerdquo Identifying ldquowhite spacerdquo opportunities necessitates exploration into areas adjacent to but outside your traditional business boundaries These white spaces are considered against the teamrsquos understanding of organizational strategic intent
An opportunity map is a tool that allows us to look at the competitive landscape through new lenses Maps typically contain unique sets of attributes (ie customer insights key signals and themes drivers etc) that help describe gaps and openings spaces that have yet to gain the attention of competitors Additionally opportunity maps help innovation teams explore ideas within specific
i n n o v a t i o n
4 7
frameworks or guidelines that have been defined and validated by research
In this phase multi-disciplinary teams collaborate to organize and classify the information into opportunity spaces which may include or be shaped by bull Unmet consumer needs bull Newly-discovered consumer needs bull Unarticulated customer needs bull Broad customer aspirations bull Key gaps bull Value drivers bull Distinctive intersections bull Macro product amp service-design trends bull Key enabling technologies
Creating and refining opportunity maps include the five following activities
bull Validating themes A team discusses debates contrasts and compares opportunity-space attributes against research findings and organizationalbrand understandings
bull Forming combinations Roughing out and loosely articulating opportunities by combining insights themes and signals from research in ways that leverage and make sense of their attributes and potential
bull Crafting thick descriptions The opportunity space is clearly defined and articulated
bull Testing Opportunity spaces are tested against a point scale that is designed to maintain consistencies with the overall project and business objectives Each map is also put through a ldquospark testrdquo that must inspire a minimum number of initial product ideas within a condensed time frame in order to be included
bull Meta mapping and design Once the initialindividual maps have been validated described and tested the team steps back to place them in the right proximity to one another This is done within a larger meta view or perspective that explicitly suggests a coupling of one or more opportunity spaces whose attributes may align compliment and enhance one another
phase 4 ideation and ConCept developMent (iCd)
The Ideation and Concept Development phase draws on all learning discussions and feedback that took place in the previous 3 phases to elicit ideas that sit within between and adjacent to the previously defined opportunity spaces
At the front-end ideation and concept development is intended to be intuitive open-minded and rough around the edges Emphasis is placed on generating a large volume of high-potential ideas defining real contexts of use and user experiences articulating benefits and describing how an ideaconcept may align customer needs organizational competencies and business goals Early on rational criticism is generally set aside as a follow-up or secondary activity specifically employed to ldquorein-inrdquo emotionally charged ideation-and-concept development sessions
Core activities in this phase typically include
bull Group Sharing of initial ideas which provides an informal time and space that help team members dump vent and share any ideas abstract thoughts and intuitions they developed during the previous phases All content is captured and circulated for review
bull Ideation amp Concept Re-Articulation a follow up to the more informal venting of ideas It methodically moves through opportunity spaces one-by-one and in combination describing and re-articulating ideas and concepts Here more critical and rational lenses are applied This process is usually complimented by collaborative ldquowhite-boardrdquo sketching which helps improve communication and inspire the further building uponevolution of ideas
bull Written Descriptions which capture and describe the ideas from all previous ideation sessions in greater detail for review and selection
bull IdeaConcept Review amp Selection Prior to undergoing more intensive concept sketching ideas and concepts are reviewed by a core team with a deep understanding of the research business and organizational goals in order to determine the most desirablefeasible and compelling ideas In some cases a variety of metrics and filters are employed to further analyze the potential of an idea before moving forward
bull Initial 2D Concept Sketching brings ideas to life through a variety of expressive techniques including simple product sketches that communicate intended function and form basic platform wireframes and information architectures device and or interface mock-ups maps system and experience cycle diagrams Initial concept sketches may explore a variety of formal and functional approaches to one idea so that diverse qualities and characteristics can be expressed and discussed
i n n o v a t i o n
4 8
phase 5 rapid ConCept prototyping (rCp)
Prototyping is an iterative process that focuses on expressing and collecting information on requirements and on the adequacy and functionality of innovative product ideas Rapid prototyping and prototypes ndash as a process and as a tangible outputartifact ndash are an important data resource used during the stages of product development
The goal of RCP is to leverage various rapid-prototyping techniques to provide the right model artifact types which can be used for different testing procedures eg internal design evaluations and consumer co-creation and context labs At the front-end these techniques help reduce costs
Idea Couturersquos front-end prototyping typically manifests itself at three levels of output and fidelity depending on the product idea type and its associated testing requirements These three levels are
bull Low-Fidelity Rapid Prototype or a representation of an idea that goes beyond a sketch yet is clearly unfinished and rough A low-fidelity prototype helps bring people onto the same ldquoconceptual pagerdquo by communicating the essence of an idea quickly and efficiently The prototype is used to inspire questions further discussion and ideation providing just enough information to obtain initial feedback for learning and decision-making Low fidelity ldquopaper prototypesrdquo can be made quickly at a low cost and with little effort They usually explore and expand on ideas rather than reduce and evaluate them They also demonstrate the bits and pieces of what could be rather than what is or will be Because of their low cost paper prototypes can also be used to explore one idea from a variety of perspectives playing with suggesting and testing a multiplicity of potential directions
bull Mid-Fidelity Rapid Prototypes represent the gradual refinement of an idea A medium-fidelity prototype incorporates feedback and knowledge gained from previous prototyping phases and focuses on increasing the execution of an idea by communicating its critical elements (forms functions and flows) in more detail A medium-fidelity prototype while obviously incomplete demonstrates more clearly the intended scale style proportion functionality and user experience of an idea While a low-fidelity prototype might seek to explore and even exaggerate these elements a mid-fidelity prototype appears to be a more rational focused tangible usable execution
of the idea It is also interactive enough to elicit more detailed and measurable feedback Finally a medium-fidelity prototype should help to exposereveal mistakes early and cheaply enough so as to reduce risks and avoid increased development costs further down the road
bull 3D CAD Based Renderings amp Modeling Mid ndash to high-fidelity 3D renderings establish a very clear picture of an idea and can be almost infinitely manipulatedadjusted to communicate that idea within a variety of chosen contexts Once created a 3D rendering enables designers to quickly and efficiently visualize formal alternatives ie proportions colors textures material finishes branding variations etc While not a physical representation high-fidelity renderings offer scalable and compelling concept-visualization alternatives that help close the imagination gap among stakeholders For additional hands on testing and evaluation computer renderings can be outputted as more concrete 3D and costly rapid-prototyping processes like stereo lithography (SLA) or fuse deposition modeling (FDM)
phase 6 CustoMer Co-Creation (CCC)
Customer Co-Creation Labs are exploratory sessions designed to identify and examine consumersrsquo behaviors motivations needs opinions attitudes and ideas Conducted as informal peer-group conversations and through a series of semi-structured individual exercises they give participants an active voice in designing the brands experiences and engagements that will best fit into and fulfill the context of their lives
At the front-end Customer Co-Creation Labs help bring customers deeper into the early stages of the innovation process empowering them to help shape the final outcomes These collaborative ldquohands-onrdquo sessions enable critical learning to emerge from such direct input and interaction The knowledge and insights captured from labs is fed directly back into the early stages of concept design and development helping teams further clarify directions and make critical improvements Additionally Co-Creation Labs help mitigate downstream risks by placing ideas in front of customers early in order to capture critical feedback
Labs are usually planned designed and run by a multi-disciplinary team that includes anthropologists designers human factor specialists and usability strategists This inter-disciplinary approach guarantees that many unique perspectives lenses and personalities will help to connect with observe and extract a diversity
i n n o v a t i o n
4 9
of salient information and feedback from customers during and after creative sessions
Core activities in this phase typically include bull Goal setting bull Lab design bull Co-creative facilitation bull Post-lab reviews bull Key insights amp recommendations bull Knowledge transfer
Customer Co-Creation Labs help to bull Uncover additional customer needs and motivations bull Re-evaluate assumptions and insights from previous research phases
bull Obtain meaningful feedback about potential idea and design directions by placing early stage rapid prototypes in front of end-users
bull Elicit highly personal customer-centric ideas through active hands-on co-creation
phase 7 brand and MarKeting assessMent (bMa)
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets We do this by conducting Brand and Market Assessments
It is important to take brand and market assessments into consideration early on at the front-end because they are integral to the successful introduction and adoption of an innovation Such assessments identify and develop an understanding of how key or target customer segments are likely to perceive forthcoming innovations They also determine if new products and services are aligned with existing brand positions value propositions and customer expectations
Idea Couture blends qualitative and quantitative tools methods and analysis in order to understand how new ideasconcepts may fit into existing brand narratives and market segments as well as to develop insights about how innovations may help create extend or evolve a brand toward new markets
Generally speaking most innovations fall into one of two categories disruptive or incremental Disruptive Innovations are those that have the power to re-define andor establish new markets and introduce and shape entirely new brand personalities and narratives If an organization is pursuing an innovation with disruptive
potential it will be important to identify and gain an understanding of how the potential attributes and value propositions will be perceived by customers and how levels of acceptabilitydesirability etc may in turn influence design and development considerations
Incremental Innovations typically have to play within or slightly adjacent to existing market segments and integrate align their attributes with ongoing brand narratives At the front-end it is still important to make sure that the introduction of a new product service or experience does not deliver promises and expectations that have been met already
Companies that donrsquot fully understand the complexity or try to ignore or otherwise underestimate the efforts and know-how required to navigate the fuzzy front end will pay a high price In many cases the new product will offer what the customer values or create value for the organization Or the resulting product may be perfectly viable in the marketplace but will be missing the right positioning and strategy to promote adoption Perhaps the greatest price paid will be a loss of the organizationrsquos confidence in innovation and the opportunity cost associated with that loss Our strategic fuzzy front-end integrated innovation process with inputs and outputs that fit together within one holistic system can improve innovation success rate by four fold
Innovation is a process and while the introduction of a genuinely innovative product or service may be highly publicized or even glamorous the process itself is driven much less by creative brainstorming or strategic planning than by carefully managed and highly-sophisticated cross-disciplinary thinking and research In the end getting innovation right has more to do understanding how to apply the opportunity algorithm to create growth in mature industries or create new ones
The Author
idris MooteeIdris Mootee is the CEO of Idea Couture Inc a global strategic innovation and experience design firm with offices in San Francisco Shanghai Toronto and Washington DC The firm helps Fortune 500 companies use D-school + B-Schooltrade thinking to rethink and reinvent competition imooteeideacouturecom
i n n o v a t i o n
5 0
i n n o v a t i o n
ldquoNecessity who is the mother of inventionrdquo (Plato The Republic 347 BC)
ldquoCash flow is the fatherrdquo (Roger More 2009)
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano The Sopranos TV Series 2008)
ldquoInnovation is the process of change that creates and grows wealthrdquo (Roger More 2010)
by roger More
It appears that innovation means at least several things to different people ndash any new product or service value creation or a particular ldquoculture of innovationrdquo But these and many other ldquointerpretationsrdquo of innovation are meaningless as this author contends In fact the only thing that matters is whether an innovation creates wealth And the only metric for determining wealth is net cash flow As he writes ldquoIf an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matterrdquo
Over the past decade there has been a continuous and voluminous global outpouring of government concerns media reports corporate comments and business school writing and research on the critical need for more ldquoinnovationrdquo at every level of corporate and government management Inadequate funding and the lack of a commitment by corporations and governments to ldquoinnovationrdquo have been cited as major causes of different countriesrsquo ldquonon-competivenessrdquo on the global stage The subliminal premise and presumption behind much of the writing is that ldquoinnovationrdquo is always needed always useful always positive and always a good allocation of scarce cash and human resources For many people it has literally come to be seen as its own objective doing more ldquoinnovationrdquo of all kinds and committing
What is Success in Innovation
more and more cash and human resources are always productive and always effective uses of these scarce resources
This paper will argue that much of the current writing research conceptualization and perspectives on innovation are shrouded in a series of dysfunctional hopelessly complex irrelevant non-measurable academic theories myths ambiguities half-truths and fuzzy thinking that defeat innovationrsquos usefulness to real-world professional managers These are the managers who have to decide which specific technological and other innovations to develop adopt bundle and integrate into their competitive market strategies and to which ones they should commit real cash and human resources
This paper will also argue that the primal objective of innovation must be to create and grow real wealth which is the long-term net cash flows of companies that develop apply and bundle technological and other innovations with the products and services they take to competitive global markets It is critical to put this hard cash flow metric of success on ldquoinnovationrdquo and to conceptualize it as a tough set of specific well-defined strategic choices for professional managers It is also critical that we stop considering innovation as a universally desirable human trait of ldquoleadershiprdquo or a set of corporate and management activities or a cultural dimension of people and organizations
Without this hard cash flow metric ldquoinnovationrdquo and much of the writing and research on it degenerates into a vague mythical and largely useless organizational clicheacute like many others including ldquoleadershiprdquo rdquosustainable developmentrdquo ldquoenvironmentally friendlyrdquo ldquosocially responsiblerdquo ldquosocial capitalrdquo and a host of similarly fuzzy homilies with little or no strategic or managerial substance in reality no shared concept or connotation and no metrics to determine their utility and value
This paper will also argue that there is no shortage of technological or other ldquoinnovationsrdquo in most companies nor any shortage of new ideas for new technologies products services or processes for creating and
5 1
i n n o v a t i o n
delivering them There is however a desperate shortage of successful innovations namely those that can create and grow wealth Many examples can be cited of ldquoinnovationsrdquo that were exciting but that also wound up losing huge amounts of cash This paper will argue that the major problem with innovation is not insufficient cash flow into innovation it is insufficient cash flow out Corporations and governments fund too many losers
Business schools bear a unique and special responsibility for these innovation scenarios They are the organizations that are at the core of the development teaching writing and research on professional management in both business and government Given the staggering amounts of cash that will be spent by corporations and governments in the future on technological and other innovations the role of professional management becomes paramount
The critical core and essence of professional management is the complex organizational realities facing managers making the difficult strategic choices for scarce cash and human resources in companies Innovation represents one of the most complex and difficult management processes for strategic choice It is the clear responsibility of business school research to create new concepts and tools to help managers in the processes of making these choices in specific real-world innovation situations
innovation the ManageMent Challenge
No matter what your view or perspective is on the meaning of ldquoinnovationrdquo including technological innovation there is little doubt that over the next fifty years if you measure the relative importance of the corporate and government cash and human resources that will be committed to different strategic decisions globally innovation especially technological will be by far the largest expenditure It will also be the most critical strategic competitive factor in global business
Over the past decade there has been a continuous outpouring of government concerns media reports corporate comments and business school writing and research on the critical needs for innovation at every level of corporate and government management The cry that ldquoour country doesnrsquot do enough innovation to compete globallyrdquo is becoming a familiar mantra in Canada and many other countries ldquoWe have to spend more on innovationrdquo In many countries a plethora of new government programs are constantly coming up and mutating often confusing conflicting and hopelessly administratively complex and inefficient Entire office buildings are filled with government bureaucrats running these programs
At this point there is yet another wave of Canadian federal government concern and massive additional funding for more ldquoinnovationrdquo A recent article in MacLeanrsquos magazine illustrates this (1) ldquoNuclear industry gets big boostrdquo The article goes on to say that the throne speech specifically promised to bolster science and technology spending in order to ldquofuel the ingenuity of Canadarsquos best and brightest and bring innovative products to marketrdquo
A number of quotes from the ongoing wave of concern about innovation are worth noting
bull ldquoInnovation is the route to economic growth Innovation is the creation and transformation of new knowledge into new products processes or services that meet market needs As such innovation creates new businesses and is the fundamental source of growth in business and industryrdquo (2)
bull ldquoA report from the OECD says that in future Germany should develop more innovation in its domestic marketrdquo (3)
bull ldquoCanada is poor in creating innovation and other OECD countries outperform us we rank 14th among OECD countries R and D financing by the Canadian private sector remains considerably below the OECD average In terms of business investing Canada ranks 15thrdquo (4)
bull ldquoThe Science Technology and Innovation Council state of the union report confirms Canadarsquos underperformance in innovation Data indicates that our nation suffers from low business R and Drdquo (5)
bull ldquoItrsquos beginning to look like bad news for the innovative edge the United States has long enjoyed From 1995 through 2001 China South Korea and Taiwan increased gross RampD spending by about 140 percent while the US increased its investment by only 34 percentrdquo (6)
From these notes and many more it is clear that innovation is seen as playing a central and leading role in economic success in many countries It is also clear that the funding and effectiveness of innovation is a widely-shared topic of deep and major concern in most if not all countries
What is equally clear is that in too many of these situations the conceptual meaning of ldquowhat innovation isrdquo and ldquowhat success meansrdquo is shrouded in complete ambiguity and confusion and seen differently by almost everyone you ask Until these questions are clarified billions upon billions of dollars will be invested globally
5 2
i n n o v a t i o n
by companies and governments frequently with no impact or worse result in huge and untracked cash losses
innovation the ManageMent realities
It may be a painful reality but the fact is that real innovation can only be created by managers in companies competing in global product services and processes marketplaces In viewing the management of innovation in these companies it is critical to get close to the real world competitive realities facing these professional managers
It is important to understand the tough realities they face and the competitive and strategic context for specific innovation decisions Too often these decisions are looked at in isolation as though they can be analyzed interpreted and decided outside the context of the complex competitive global situation the managers and the company are facing Some of the major factors characterizing and influencing this particular management reality are the following
bull Individual product and services innovations seldom add any value in isolation they must be integrated and physically ldquobundledrdquo with a wide range of other physical and process technologies to be applied This presents great potential risk since a particular innovation can appear to create competitive value by itself but may not be compatible with the physical and process infrastructure in which it must be embedded As an example Intel may come up with a computer microprocessor innovation but it may be too fast for the other components in a particular notebook to run with (ldquoYou donrsquot put a Ferrari engine in a dump truckrdquo)
bull A huge range of internal and external factors affect the success and failure of any innovation Innovations can have interesting and positive characteristics in and of themselves but in a real competitive situation there are hundreds if not thousands of internal and external factors many outside the control of the management team involved that will affect the success or failure of an innovation
bull What this means is that any innovation if it is to hope to be successful has got to have a huge advantages and offer competitive differentiation against the existing and competing ldquobundledrdquo customer solutions
bull In addition to all of these challenges and difficulties managing the innovation-development processes in companies there is an equally complex set of
customer and market network-adoption processes to manage When adopting a particular technological innovation organizations can take a long time to go through a very complex adoption process In many cases adoption is very slow making the imperative to develop companiesrsquo cash flows even more intense
bull In the midst of all these factors that can affect the success or failure of an innovation specific decisions are made by managers These decisions involve conceptual organizational and analytic processes of enormous ambiguity and complexity Different parts of the organization may be involved different functional managers different geographic areas and different manufacturing plants There are a lot of decisions that have to be made that affect each other and there is certainly an element of chaos
bull Different managers and organizational processes have different cultures different personalities different power systems different reward and compensation systems for the success of innovation however itrsquos viewed
bull At the real level of market competition where innovations ultimately have to make their impact and in specific productservicemarket segments every competitive and market situation is largely unique There are no simple or general solutions A particular innovation might be successful in one market in one segment in one geography and fail miserably in another There are no boilerplate solutions no two competitive strategies are the same A winning innovation for one company can be a losing innovation for another So an innovation is not in and of itself good or bad it depends totally on the unique and complex DNA of the company and the specific competitive situation
bull Another huge complexity with innovation and all professional management decisions is that the evidence is clear that faced with a particular strategic situation in all its complexity any two different teams of managers will see different factors as key and will make different strategic choices A particular innovation will be viewed differently individually and by any group of managers who are looking at it This has huge consequences for choosing innovations that can be successful versus innovations that are clearly sure to fail Individual managers and those in a group will see it quite differently And a fantastic innovation from the viewpoint of one group will be seen as a potential disaster from another grouprsquos perspective
5 3
There is no way to predict the success of any innovation before its introduction This begs the question of what makes an innovation a success
Every competitive strategy every marketing strategy and every innovation has the possibility of failure There are numerous examples of innovations that started out with great potential and wound up as dismal failures So at the very best innovation is partly a ldquocrap shootrdquo Itrsquos an issue of the probabilities of success there is no way of viewing any innovation as an absolutely sure thing to succeed
What is innovation
Clearly the word ldquoinnovationrdquo represents a complex ldquoconstructrdquo a concept of wide and divergent dimensionality and conceptualization Virtually every literature writer and manager has a different view of how to conceptualize ldquowhat it meansrdquo and what dimensions and processes define it In itself this is a major methodological challenge
The following is a brief sampling of some of the wide variety of concepts that would tell us what ldquoinnovationrdquo is
bull ldquoInnovation is the production or adoption assimilation and exploitation of a value-added novelty in economic and social spheres renewal and enlargement of products services and markets development of new methods of production and establishment of new management systems It is both a process and an outcomerdquo (8)
bull ldquoInnovation is reflected in novel outputs a new method of production a new market a new source of supply or a new organizational structure which can be summarized as doing things differentlyrdquo (9)
bull ldquoInnovation is a new way of doing something or new stuff that is made usefulrdquo (10)
bull ldquoInnovation occurs when someone uses an invention or an idea to change how the world works how people organize themselves or how they conduct their livesrdquo (11)
bull ldquoInnovation is generally understood as the successful introduction of a new thing or method Innovation is the embodiment combination or synthesis of knowledge in original relevant valued new products processes or servicesrdquo (12)
bull ldquoInnovation is a new element introduced in the network which changes even if momentarily the cost
of transactions between at least two actors elements or nodes in the networkrdquo (13)
The above sampling represents only a few of literally thousands of disparate vaguely defined confusing and clearly non-measurable concepts of innovation In itself this plethora of vague concepts represents a major block to any attempt to study and manage innovation
But it is much worse than that Governments all over the world are throwing billions of dollars at ldquoinnovationrdquo programs and incentives with no coherent or shared concept of what it is or how success in innovation can be measured As a result many government programs have become completely politicized much more about political optics than reality
What is suCCess in innovation
The question of what success means in innovation is one of enormous complexity Suffice it to say that there are as many concepts and definitions of success as there are government agencies and managers in the global universe of competing companies Many measures of the successful innovations seen in management and research literature are simply not measurable And therein lays a major problem We have a whole range of soft and loose measures for determining successful innovation Many of these measures have been used widely in government funding of innovation and frequently without any concern for what they mean conceptually or with any means of actually measuring them Some examples of commonly seen ldquosuccess conceptsrdquo are
bull Commercialization
bull Market introduction
bull Bundling or integration into a product or service
bull Export to some market
bull Purchase by a particular customer
bull Generation of some revenue dollars
bull A successful application of the technology in the sense that it physically works
bull Formation of a ldquocompanyrdquo based on the innovation
bull Value ndash creation
Value ndash creation occupies a special place in this list of potential ldquosuccessrdquo metrics To be successful an innovation must clearly create differentiated value for the sets of buyers involved However the problem is that creating value for customers can cause or be
i n n o v a t i o n
5 4
accompanied by huge cash losses for the company involved According to this definition the majority of Nortelrsquos innovations created value ndash while the company went bankrupt
There are many more of these ldquosuccessrdquo concepts These diverse often-conflicting and mostly non-measurable concepts present major barriers to any notion of the coherent professional management of innovation Worse every one of the above concepts can be presented as a success while the venture suffers huge real cash flow losses
the CritiCal Question of Measurable obJeCtives
The objectives for any innovation must be measurable Objectives that are not measurable are just so much ldquofluffrdquo and completely useless to managers in any situation Many of the above innovation objectives are just that such as ldquocommercializationrdquo ldquomarket introductionrdquo ldquoexport to a global marketrdquo and so on But equally dangerous are measurable objectives that are misleading or downright irrelevant such as revenue market share and others
a neW ConCept innovation as Wealth Creation and groWth
I believe that the only useful and valid definition of innovation is the following one ldquoInnovation is the process of change that creates and grows wealthrdquo
By this concept the artificial separation of ldquowhat innovation isrdquo and ldquothe objectives of innovationrdquo is eliminated and the primal purpose and success metric of innovation to create wealth is clearly established
An excellent exemplar of conceptualizing innovation clearly as wealth and cash flow creation is General Electric one of the leading-edge companies in embracing net cash flow creation and growth as the primary driver of overall financial performance and the whole range of other financial metrics In outlining the GE concept of breakthrough projects one writer notes that ldquobreakthrough projects are planned undertakings aimed at achieving tangible bottom-line (net cash flow) results in a short period of timerdquo(14)
It follows that if business school research is to help managers the primary research focus must be on management process research that provides real-world tools and concepts that managers can apply in managing different stages and parts of the innovation process for specific innovation opportunities
understanding real Wealth Creation Cash floW ndash earn vs burn
Historically many different misleading and conflicting financial measures of wealth creation have been observed and applied These include bull Revenue bull Profit bull ROI bull ROE bull ROA bull EBITDA
In many cases these metrics can indicate financial ldquosuccessrdquo even though net cash flows are negative An obvious example is revenue (an innovation can generate high revenue in dollars per year yet lose huge amounts of net cash flow) There are many other examples
This paper strongly suggests that the most useful and realistic financial metric for wealth creation is net cash flow Wide and credible recognition of the centrality of net cash flow as the ultimate real metric of financial success and disastrous failure has been slow in coming Such recognition has also been hastened by the recent debacles in the banking and investment community General Motors and Nortel not to mention WorldCom To put it simply if an innovation is pumping real positive net cash flow over time all of the other assorted financial metrics will be just fine If it is losing cash flow the other metrics donrsquot matter
linKing innovation to net Cash floW the CritiCal drivers
Once you have a clear set of cash flow metrics they can be connected to the drivers of net cash flow for product and service innovations A primal and simplified concept of cash flow creation is shown below Over the time horizon of the innovation the forces of negative cash flows (fixed costs and investments) must be overcome by the forces of positive cash flow (revenues x margins) to create positive net cash flows (NCF) In simplified conceptual summary
bull POSITIVE CASH FLOWS $YEAR (ldquoCASH EARNrdquo) = REVENUE ($YEAR) X PERCENT MARGIN ()
bull NEGATIVE CASH FLOWS$YEAR (ldquoCASH BURNrdquo) = FIXED COSTS ($YEAR) + INVESTMENTS COSTS ($YEAR)
bull NET CASH FLOWS (NCF $YEAR) = POSITIVE CASH FLOWS ndash NEGATIVE CASH FLOWS = CASH EARN ndash CASH BURN
i n n o v a t i o n
5 5
If these cash flows are well and brutally estimated before any cash is committed to an innovation and tracked and estimated during the process analyzed as they unfold and tracked after market introduction and buyer adoption they are cruel and unyielding you canrsquot make a ldquoloserrdquo look like a ldquowinnerrdquo
the need for aCCounting and finanCe Cash floW traCKing
Sadly the fields of accounting and financial analysis are just today waking up to the realities of cash flow tracking often replacing it with a bewildering array of complex confusing contradictory and often misleading financial metrics Recent experience has shown that the bankruptcies of GM Nortel Lehman Brothers and others were finally signalled by largely unseen unmeasured untracked unexpected unpredicted and catastrophic cash flow losses
The most unbelievable aspect of these similar cases is the fact that while these losses were occurring each of these companies had hundreds of MBAs from the finest business schools in senior finance and accounting roles The simple fact is that in many of these cases these managers were tracking the wrong financial metrics as this paper has previously noted As a result of these disasters a quiet revolution in finance and accounting is gaining steam to focus on cash flow tracking
traCKing innovation proCess Cash floWs the CritiCal diMension
ldquoThe idea is to get more cash out than we put inrdquo (Tony Soprano the Sopranos TV Series 2008)
The brutal reality of cash flows for the innovation process is that the negative cash flows (ldquocash burnrdquo) come first (investments and fixed costs) and the positive cash flows (ldquocash earnrdquo) come later Here the crude wisdom of Tony Soprano and his mobster colleagues shines Over the time span of the entire innovation process you have to ldquoearnrdquo more cash than you ldquoburnrdquo It is conceptually childishly simple yet it seems to elude many managers financial analysts accountants bankers and government staff who should know better
As a result there are many examples of innovations that ldquoburnedrdquo so much cash that it was mathematically impossible for them to ever ldquoearnrdquo enough cash to create any net cash flow Why were they not stopped A spectacular example is the case of General Motorsrsquo Saturn
Over the span of its development and market life Saturn lost at least $11 billion of cash flow Careful examination of this case shows that early in its development it became clear that there was no mathematical way Saturn could ever produce positive net cash flow In the project the early investment and fixed costs commitments (cash burn) were so high that there was no mathematical chance of ever overcoming them with positive cash flow (cash earn) As the market entry and plans for adoption precede the cash flow dynamic takes over and reacts to the strategy and all the strategic changes managers make
tWo innovation failures
It is not difficult to find examples of innovation failures Each product or service innovation will be briefly described primarily on the characteristics outlined earlier that predictably drive it into high negative net cash flow or make it highly inferior in net cash flow to competing solutions to the problems
Wind turbines
The need for more kilowatts per hour (KWH) of electrical power globally is growing and serious In the face of this there are a range of power generation sources depending on location and the unique country situation The innovation of wind turbines has been widely touted as a strong ldquogreenrdquo renewable electric energy source However careful analysis reveals that turbines are hugely inferior in wealth creation and cash flow terms compared to nuclear power plants
Positive cash flows
bull The amount of money paid by household and business power users in $ per MWH (megawatt-hour) has tended to be somewhat stable and low They have been driven by the historical large-scale ldquoconventional ldquopower plants long-term government debt amortization supported by long power plant life-cycles and the roles of government power monopolies and regulation It is unlikely that household and business power users will be willing to pay a multiple of todayrsquos $MWH so any real cash losses will show up somewhere as taxation or government subsidies
bull Because of their intermittent operation (wind does not always blow) wind turbines need power backup from some other sources (example of another source) to sustain the needs of the electrical power grid
Negative cash flows
bull Investments per MWH of power are far higher for wind power than for nuclear energy and other power sources
i n n o v a t i o n
5 6
bull Operating fixed costs per MWH are far higher for wind power than for nuclear energy especially when you analyze the realities of up-time and actual power outputs of existing wind turbines
bull A recent article by Schleede (15) highlights in detail the extreme inefficiency and high investment and operating costs of wind turbines when compared to other alternative energy sources
bull Another article by Will (16) outlines the incredible cash flow inefficiency of wind turbine power compared to nuclear power Will notes that ldquoAmerica which pioneered nuclear power is squandering cash on wind power which provides 13 percent of the nationsrsquo electricity it is slurping up $30 Billion of tax breaks and other subsidies amounting to $1882 per MWH 25 times as much as the combined subsidies for all other forms of electricity productionrdquo He goes on to note that ldquoTo produce 20 percent of Americarsquos power by wind would require 186000 tall (40 stories tall) turbines and occupy land area the size of West Virginia The same power could be produced by four nuclear plants occupying four square miles of landrdquo
What all this means is that the positive cash flows per MWH from both wind and nuclear power from the sale of MWH are about the same but wind turbines use far higher negative cash flows per MWH to generate the power Compared to nuclear power wind power is an innovation failure
general Motors volt electricgas hybrid car
The excitement around the innovation of alternative energy cars and particularly ldquoelectricrdquo cars is well known Faced with its imminent collapse General Motors is introducing the innovation of the Chevy Volt electricgas hybrid car Again as above a cursory analysis of the underlying cash flow fundamentals reveals huge likely long-term net cash flow losses from this innovation
Positive cash flows
bull From a competitive point of view Volt is not an electric car such as the Nissan Leaf and other emerging products It really competes with gaselectric and dieselelectric alternatives of which there are many on the market already
bull Revenues will likely be very low with likely very low unit sales with very high Volt prices limited range a small market segment for ultra-high gas mileage ldquogreenrdquo cars and successful existing and proven competitive cars at much lower prices and proven
reliability (Toyota Prius Honda Insight Honda Civic hybrid Ford Fusion hybrid and others)
bull Margins will likely be slim and possibly negative with very high variable production costs compared to likely car prices A key component of these high variable production costs will be the batteries which have proven to be a major problem for GM
bull Positive cash flows will therefore be very low if there is any at all If margins turn negative potential positive cash flow also turns negative If this occurs the whole Volt innovation will suffer even greater cash losses
Negative cash flows
bull Investments will likely be very high with new motive technologies never tried before and extremely high and uncertain battery technologies and costs
bull Fixed costs will likely be high with limited cross-vehicle scale economies and sharing with other cars in the General Motors portfolio Also GM seems determined to build its own battery production plants
the CritiCal iMportanCe of stopping innovation losers
One of the major problems facing managers and companies in their innovation processes is recognizing and trying to stop the negative cash flows going into losers that once looked like winners Two examples were cited earlier Sadly there are many more
The Chevy Volt project is a dangerous example By General Motorsrsquo own account the car will likely suffer major negative cash losses for at least a few years for the reasons cited above The risk here is that in the future many more competitors will enter the electric car market notably from China and South Korea These companies have already proven their ability to compete with high quality low-priced high ndash customer-value cars already such as Hyundai and Kia They will be formidable competitors in the electric car market segment So why not stop the Chevy Volt innovation and go back to the drawing board
The Author
roger MoreRoger More is an Associate Professor of Marketing at the Richard Ivey School of Business His latest book is Transforming New Technologies into Cash Flow Creating Market-focused Strategic Paths (Haworth Press 2006)
i n n o v a t i o n
5 75 7
sustainability
5 8
s u s t a i n a b i l i t y
ldquoIt doesnrsquot fit the business caserdquo or ldquoHow are we supposed to measure the impactrdquo are just two of the most common excuses corporations offer for not drawing up and implementing sustainability initiatives in all aspects of their operations These authors met with some of the leading practitioners of sustainability and identified how organizations can stop making excuses and start building sustainability into everything from supply chain activities to HR practices
by pamela laughland and tima bansal
The evidence is in Firms that invest in sustainability are no worse off financially than those that do not1 Plus their employees customers and investors are happier and more committed2 Even the simplest of activities such as philanthropy can yield financial rewards3 So why isnrsquot every firm jumping on the sustainability bandwagon
We asked 15 organizations that are on the leading edge of sustainability to tell us why In fact every year we assemble representatives from leading corporations in different industries to brainstorm and discuss the reasons
The Top Ten Reasons why Businesses arenrsquot
More Sustainable
why Canadian firms donrsquot take action on social and environmental issues The top 10 reasons they identified are listed below
Top 10 hurdles for business sustainability in 2011
bull There are too many metrics that claim to measure sustainabilitymdashand theyrsquore too confusing
bull Government policies need to incent outcomes and be more clearly connected to sustainability
bull Consumers do not consistently factor sustainability into their purchase decisions
bull Companies do not know how best to motivate employees to undertake sustainability initiatives
What is business sustainabilityBusiness sustainability is often defined as managing the triple bottom line ndash a process by which firms manage their financial social and environmental risks obligations and opportunities We extend this definition to capture more than just accounting for environmental and social impacts Sustainable businesses are resilient and they create economic value healthy ecosystems and strong communities These businesses survive external shocks because they are intimately connected to healthy economic social and environmental systems
the proCess for identifying the top 10
Fifteen representatives of leading organizations across different sectors gathered for a one-day roundtable in Toronto to identify the top 10 sustainability issues facing Canadian business for 2011 This Leadership Council which convenes annually to set priorities for the Network for Business Sustainability included BC Hydro Canadian Pacific Environment Canada Holcim Canada Ltd the International Institute for Sustainable Development Industry Canada The Pembina Institute Research In Motion Limited SAP Canada Inc Suncor Energy Inc TD Bank Group Teck Telus Tembec and Unilever Canada Inc These firms identify global priorities from the Canadian perspective to ensure that the priorities have global relevance These representatives engaged in a 3-stage process
1 Identifying their own individual issues
2 Aggregating and refining the issues into meaningful categories and
3 Ranking priorities by importance
This process yields a set of issues that is representative prioritized and agreed-upon Current and past priorities for the Network for Business Sustainability can be found here
5 9
s u s t a i n a b i l i t y
bull Sustainability still does not fit neatly into the business case
bull Companies have difficulty discriminating between the most important opportunities and threats on the horizon
bull Organizations have trouble communicating their good deeds credibly and avoid being perceived as greenwashing
bull Better guidelines are needed for engaging key stakeholders such as aboriginal communities
bull There is no common set of rules for sourcing sustainably
bull Those companies that try leading the sustainability frontier often end up losing
We discuss each of these hurdles below
1 there are too Many MetriCs that ClaiM to Measure sustainabilitymdashand theyrsquore too Confusing
What gets measured gets managed Issues or goals without obvious metrics are much harder to tackle Sustainability initiatives can be particularly difficult to measure because they often affect people and society at a macro level and their organizational implications are unclear Further their impacts are not immediately obvious and they depend on who implements them and how Many suites of metrics and measurement systemsmdashsuch as the Global Reporting Initiative ecological footprint and life-cycle assessmentmdashcurrently exist to help managers measure their sustainability
The range of options often results in more problems than solutions What makes one metric or suite of metrics better than another and how can businesses judge which is most appropriate for their needs As one manager said ldquoItrsquos important to know which sustainability metrics are most meaningful and integrate them with traditional business metricsrdquo Managers recognize that different metrics serve different purposes some are most relevant to particular sectors such as manufacturing while others focus on specific issues such as carbon Some metrics focus on products whereas others focus on organizations some set common benchmarks whereas others inspire leadership It seems as if there is a veritable cacophony of metrics standards and certifications Even leading businesses need guidance on which ones will help them benchmark signal their commitment to sustainability and identify areas that need improvement
2 governMent poliCies need to inCent outCoMes and be More Clearly ConneCted to sustainability
Governments have several tools at their disposal such as taxes regulations and markets to encourage businesses to steward environmental resources However they are often applied in piecemeal fashion poorly measured or used ineffectively Businesses and management often want to ldquodo the right thingrdquo and appropriate policy can support this mindset Leading businesses want policies that push all organizations to improved sustainability outcomes In doing so firms can put into place long-term measures and innovate new products and practices that move them closer to those goals
Businesses also want to know the best practices for collaborative consultation and policy development involving government business and other stakeholders They do not want to be adjuncts but to work with government collaboratively and meaningfully One manager asked ldquoHow can we build bridges between government and business that will allow for knowledge sharing and a solid foundation for future business sustainability-related policiesrdquo In other words business wants to be involved in the process such that the resulting policy is effective efficient and consistent with both the needs of business and society
3 ConsuMers do not Consistently faCtor sustainability into their purChase deCisions
Many decisions consumers make ndash from what food to buy to how much energy to use ndash involve sustainability-related tradeoffs We constantly trade off different types of impacts (social environmental or economic) at different levels (personal communal or societal) over different time periods (now or later) In the words of one manager ldquoMany people demand cleaner energy but refuse for example to allow windmills in their community How can we help consumers make informed tradeoffs when it comes to sustainabilityrdquo Understanding how consumers value sustainability in the context of other product attributes would help businesses develop products that meet their needs Further there may be a role for business in educating consumers on issues and product attributes resulting in more informed purchasing decisions
Still this doesnrsquot just apply to consumersmdashit also applies to investors Shareholders and lenders must decide where to invest their money How do they choose between
6 0
s u s t a i n a b i l i t y
different companies which requires trading off one set of corporate attributes for another Should they invest in a power producer using cheap coal or another moving towards renewable or alternative energy Understanding how people make tradeoffs will help businesses make sustainable choices
4 CoMpanies do not KnoW hoW best to Motivate eMployees to undertaKe sustainability initiatives
Survey research shows employees would rather work for sustainable firmsmdashand some would even forego higher earnings to do so4 Firms must better leverage this knowledge to attract and retain the best employees To do this sustainability managers want to know which employee incentive plans are most valued and so likely to be effective One manager clearly identifies this need asking ldquoWhat does the cumulative experience of business tell us about how best to incorporate sustainability performance targets into employee incentivesrdquo
These mechanisms should allow firms to leverage their sustainability initiatives and values building the right capacity internally and ensuring progress is made towards sustainability goals An enduring commitment to sustainability one that can only be achieved over a long time horizon may separate those companies that are truly committed to leading change from those that are only keeping pace with their peers One manager at a leading firm points out ldquoItrsquos easy to generate ideas and start initiatives at the grassroots level But how do we sustain that momentum for fruitful innovation across the entire organizationmdashand over the long termrdquo However such commitment requires the buy-in and sustained interest of employees In this way good employees attract other good employees and the firm moves towards a virtuous and enduring cycle of sustainability
5 sustainability still does not fit neatly into the business Case
Most sustainability managers are beyond asking if it pays to be good (or green) However they are often called on to explain and defend sustainability activities Current financial decision-making does not fully capture the value of sustainability-related investments These investments are often based on long-term and intangible rewards whereas many investments made are based on the short-term impact on the bottom line One manager pointed out that the payback period for sustainability investments often exceeds that required to
approve projects Sustainability executives may resort to intangibles to justify corporate environmental and social investments Initiatives are often treated therefore as lsquooff-gridrsquo or lsquoone-offsrsquo rather than a recurring component in all decision-making activities Another manager said ldquoWe need to be able to value brand reputation and the externalities arising from our business activitiesrdquo
Sustainability managers want to know exactly how returns on sustainability investments can be measured and seen What are the short-term and long-term ways to assess and justify these investments How can sustainability executives demonstrate the value of sustainability within the decision-making language and framework of finance executives Until sustainability becomes accepted as a legitimatemdashand value-creatingmdashactivity it may lose out to projects that are more easily understood and evaluated
6 CoMpanies have diffiCulty disCriMinating betWeen the Most iMportant opportunities and threats on the horizon
Numerous threats are looming for businessmdashfrom financial crises to climate change to local land issues to health pandemics It is difficult to judge which of these risks warrants attention and often more challenging to prioritize them Businesses need guidance on how to evaluate the materiality of an issue both for disclosure purposes and for strategic planning One manager points to the complexity facing their business ldquoThere are myriad opportunities and risks we could tackle as an organization We need to understand where to focus our attention to advance our practices now and in the futurerdquo
Equipped with an understanding of which risks and opportunities are most material to their organization managers can then prioritize material issues translate them into internal strategies and communicate them to stakeholders
7 organizations have trouble CoMMuniCating their good deeds Credibly and avoid being perCeived as greenWashing
Claims made by some businesses and NGOs regarding sustainability are perceived to be credible whereas others are met with skepticism or disbelief The different reactions are likely related to attributes of the organization making the claimsmdashits size its structure its actions or its motivations Even leading businesses are wary of touting their successes as such communications can invite public criticism for the things that they arenrsquot doing
6 1
Companies want to know how to communicate their message credibly so the integrity of their efforts is clear This issue is critically important as most of the benefit of CSR activities can depend on whether stakeholders believe the message to be truthful One manager noted ldquoPolls show people consider academics and NGOs more credible than corporations and government What sincere action can organizations undertake to foster public credibilityrdquo
8 better guidelines are needed for engaging Key staKeholders suCh as aboriginal CoMMunities
Many businesses have experienced very positive interactions with aboriginal groups resulting in benefits for both parties Other businessesmdashsometimes operating in the same regionsmdashhave had negative interactions One manager recognizes the unique viewpoint that is required to navigate such situations ldquoOrganizations need to understand the aboriginal perspective on sustainable developmentmdashwhich extends the traditional view of sustainability in resource development beyond the environmental social and economic pillars to include cultural and spiritual dimensionsrdquo
By building a more robust understanding of the aboriginal perspective on sustainability the relationship between the business and the aboriginal community can be built on mutual respect and trust which is more likely to lead to positive engagement Furthermore this understanding may inform the business community of new approaches to sustainability and stakeholder engagement both within the aboriginal communities and outside of them
9 there is no CoMMon set of rules for sourCing sustainably
Businesses want to purchase products and services that are environmentally and socially responsible But the process of identifying sustainable suppliers is not always straightforward and the means for comparing products is not always obvious Sustainable sourcing decisions may also require industry-specific knowledge and practices or data that just may not be available
Identifying a set of best practices for sustainable sourcing would provide organizations with targets for benchmarking as well as guidance on managing their supply chains It would also yield an opportunity for leading businesses to showcase their good practices One manager says ldquoSustainable sourcing is key for us How can we get people to understand what it means for our business Are there lessons from what wersquove done
that can help other industriesrdquo Sustainable sourcing is not just about sustainabilitymdashit is also about managing and mitigating risks This issue is clearly one in which the business case and societal good are aligned and yet many businesses remain perplexed about how to manage their supply chains sustainably
10 those CoMpanies that try leading the sustainability frontier often end up losing
Leadership in any fieldmdashsustainability includedmdashcarries with it some clear rewards For instance leading organizations can attract new customers and foster loyalty with employees and community stakeholders But there are also risks associated with being on the cutting edge For example sustainability leaders may overinvest in technologies that never yield the expected rewards be overtaken by a second-mover who builds on the leaderrsquos ideas to leapfrog into the lead or lose the support of internal stakeholders with shifting corporate priorities
One manager highlights this paradox ldquoBeing a leader means sticking your head above the parapet it exposes you to criticism internally and externally but the potential rewards are great Executives introducing new sustainability targets have to do their homeworkrdquo The ability of companies to benefit from the potential upside and deflect risks will be key to ensuring that there are always businesses willing to raise the bar
the business Model for the 21st Century
In most discussions about the business case for sustainability the emphasis has been on the bottom line The value of sustainability has been analyzed from every directionmdashrevenues profits and share pricesmdashand it is clear that in some circumstances sustainability can pay off However sustainability is more than just about firm-level benefits Businesses business schools and society recognize that the current course of production and consumption cannot be sustained within our natural resource limits
Businesses develop the products and services consumed by individuals around the world The vast resources extracted by business for societyrsquos use have created waste streams that find their way into our land air and water and compromise human health New businesses are being built on an understanding of the problems that have emerged through the 20th century Increasingly old businesses are evolving to use fewer resources intensify the resources they do use and renew and reuse the products they sell New relationships are forming between businesses as firms realize synergies from
s u s t a i n a b i l i t y
6 2
interdependence one firm can profit from anotherrsquos waste or several firms can benefit through flexible supply chain relationships built on common interest
The 21st century will reveal a new paradigm in which business is no longer separate from society Realizing the new ldquobusiness-as-societyrdquo paradigm will require the efforts and ingenuity of organizations across sectors and industries It will challenge the current generation of business leaders to apply their hard-won knowledge to novel problems and the next generation to cut their teeth on issues of unprecedented importance and complexity Those businesses that identified the hurdles and challenges described in this report along with those businesses that aim to overcome them will help to shape this new business landscape
The concept of sustainability is undeniably compelling Done right both business and society benefit
The Authors
pamela laughlandPamela Laughland is a Research Associate at the Richard Ivey School of Business and Knowledge Coordinator for the Network for Business Sustainability
tima bansalTima Bansal is Professor Richard Ivey School of Business She is Director Iveyrsquos Centre for Building Sustainable Value and Executive Director Network for Business Sustainability
references
bull 1 Orlitzky Marc Frank L Schmidt and Sara L Rynes (2003) Corporate Social and Financial Performance A Meta-Analysis Organizational Studies 24(3) 403-441
bull 2 Grant Adam M and Sabine Sonnentag (2010) Doing good buffers against feeling bad Prosocial impact compensates for negative task and self-evaluations Organizational Behavior and Human Decision Processes 111 p13-22
bull Harrison Jeffrey S Douglas A Bosse and Robert A Phillips (2010) Managing for stakeholders stakeholder utility functions and competitive advantage Strategic Management Journal 3158-74
bull Jacobs Brian W Vinod R Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm Journal of Operations Management 28 430-441
bull 3 Lev Baruch Christine Petrovits and Suresh Radhakrishnan (2010) Is doing good good for you How corporate charitable contributions enhance revenue growth Strategic Management Journal 31 182-200
bull 4 Montgomery David B and Catherine A Ramus (2007) Including Corporate Social Responsibility Environmental Sustainability and Ethics in Calibrating MBA Job Preferences Stanford Graduate School of Business Research Paper No 1981
6 3
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